International Accounting Practices
(Getting the numbers right)
Chapter 2
Firm in Homeserve foreign markets / source from abroad?
Stay domestic
Export
Export or local production?
Import or local production?
ImportMultinational activity:
horizontalMultinational activity:
vertical
no
yes, serve foreign market
yes, source from abroad
exportlocal
productionimportlocal
production
Two types of trade: intra-firm and inter-firmConsisting of trade in final goods, services, and intermediate goods
Two types of multinational activity: horizontal and verticalMultinational = firm owning and controlling value adding activities in two or more countries
triggers intra-firm trade
Figure 2.1 Home firm decision tree
Country A Country B
Market A Market B
Multinational(producer)
Multinational(producer, marketer)
Foreign subsidiary (producer)
Foreign subsidiary (assembler)
FDI
FDI
Finished products
Finished products
Finished products
Finished products
Components
Horizontal multinational
(market seeking)
Vertical multinational
(efficiency seeking)
Fig. 2.2 Horizontal and vertical multinational activity
Figure 2.3 US export shares in 2010
Source: US census Bureau, own calculations
US export shares (%), 2010
S+C America, 10.8
European Union, 18.8
Pacific Rim, 25.5
Canada+Mexico, 32.2
Other, 6.1
Africa, 2.2 OPEC, 4.3
Beugelsdijk, Brakman, Garretsen, and van Marrewijk International Economics and Business© Cambridge University Press, 2013 Chapter 2 – Getting the numbers rightTable 2.1 US imports and exports ($ billion), 2010
Imports Exports Difference % of total (a) (b) (b)-(a) )/()(100 abab
World total 1,912 1,278 -634 -20
Canada 276 249 -28 -5 Mexico 230 163 -66 -17 Brazil 24 35 11 19 Norway 7 3 -4 -38 Netherlands 19 35 16 30
Switzerland 19 21 2 4 Germany 83 48 -34 -26 Nigeria 31 4 -26 -77 OPEC 150 54 -96 -47 Cyprus 0.01 0.13 0.12 85 Source: US Census Bureau
Beugelsdijk, Brakman, Garretsen, and van Marrewijk International Economics and Business© Cambridge University Press, 2013 Chapter 2 – Getting the numbers rightTable 2.2 A firm’s statement of income1
Revenue Cost of sales Gross profit Selling, administrative, and other expenses Research and development Other income Other expenses Operating profit Interest income Interest expenses Currency exchange gains or losses Income before taxation Taxation Minority interests Income after taxation Income from discontinued operation (net of taxes) Income on disposal of discontinued operations (net of taxes) Cumulative effects of changes in accounting principles Net income 1 Neither the terminology nor the complete set-up need be similar across countries, firms and periods. For example, gross profit is often referred to as gross margin, and many firms list special items (such as merger or reorganization costs). In this table we list a “common denominator”.
Micro-level accounting: A firm’s annual report
• Rules of double-entry bookkeeping
• Complications1. How should the firm account for foreign-currency
transactions?
2. Cross-country financial management (exchange rate risk management, fiscal optimizations,...).
3. Diverging country-specific accounting regulations.
Balance of payments: Records all economic transactions between the residents of the country and residents of the rest of the world.
Each transaction or exchange results in two opposite flows of value.
Double-entry bookkeeping.A credit or positive item is the flow for which the country is
paid—it is the item that the country gives up in the transaction, and it sets up a claim on the foreign resident, so that funds (or "money") flow into the country.
A debit or negative item is the flow that the country must pay for—it is the item that the country receives in the transaction, and it sets up a foreign claim on a resident of the country, so that funds (or "money") flow out of the country.
If we add up all items for the country's balance of payments, it must add up to zero
Macro-level accounting: A country’s balance of payments
Figure 2.4 A country’s balance of payments
The balance of payments
Goods
Services
Income
Current transfers
Current account
Capital and financial account
Reserve assets
Direct investment
Trade balance
Portfolio investment
Other investment
Capital account
Financial account
The balance of payments
Goods
Services
Income
Current transfers
Current account
Capital and financial account
Reserve assets
Direct investment
Trade balance
Portfolio investment
Other investment
Capital account
Financial account
Source: van Marrewijk (2012, p. 411)
Figure 2.5 Current account balance; % of GDP, 1980-2012
Source: based on data from World Development Indicators online (1980-2010) and The Economist, June 9, 2012, “Trade, exchange rates, budget balances, and interest rates” (2012 estimate).
-8
-6
-4
-2
0
2
4
6
1980 1985 1990 1995 2000 2005 2010
United States Japan
-15
-10
-5
0
5
10
15
20
1980 1985 1990 1995 2000 2005 2010
Malaysia Philippines
-8
-6
-4
-2
0
2
4
6
8
10
12
1980 1985 1990 1995 2000 2005 2010
Netherlands Australia
-6
-4
-2
0
2
4
6
8
10
12
1980 1985 1990 1995 2000 2005 2010
Germany China
Beugelsdijk, Brakman, Garretsen, and van Marrewijk International Economics and Business© Cambridge University Press, 2013 Chapter 2 – Getting the numbers rightTable 2.3 Funding options for multinationals
Source
Location Internal External
Parent country Retained earning of the multinational parent
Equity or debt raised by the multinational parent
Local (host country) Retained earnings of local subsidiary
Equity or debt raised by multinational parent or by local subsidiary
Third country Retained earnings of the third country based subsidiary
Equity or debt raised by multinational parent or by 3rd country based subsidiary
Source: Root (1994, p. 584); the shaded box is excluded in FDI statistics.
FDI data and the capital account
• US government’s definition of foreign direct investment (FDI): ‘Ownership or control of 10% or more of an enterprise’s voting securities, or equivalent interest in unincorporated business’ (2004, M5-6).
• FDI and foreign portfolio investment (FPI)
• World Investment Report (by UNCTAD - http://unctad.org/en/PublicationsLibrary/wir2014_en.pdf) is the most important source of information on FDI flows.
a. FDI inflows; US $ bn, 2006-2011
0
500
1000
1500
2000
2006 2007 2008 2009 2010 2011
developed
developing
transition
b. FDI outflows; US $ bn, 2006-2011
0
500
1000
1500
2000
2006 2007 2008 2009 2010 2011
developing
developed
transition
c. FDI flows into developing economies; US $ bn, 2005-2011
0
50
100
150
200
250
300
350
400
450
2005 2006 2007 2008 2009 2010 2011
greenfield
M&A
Figure 2.6 FDI flows, 2005-2011
Source: based on data from UNCTAD, World Investment Report 2012; developed = developed economies; developing = developing economies; transition = transition economies.
Beugelsdijk, Brakman, Garretsen, and van Marrewijk International Economics and Business© Cambridge University Press, 2013 Chapter 2 – Getting the numbers rightTable 2.4 Inward FDI stock; US $ bn, 2009
a. USA inward FDI stock b. Germany inward FDI stock Total 2,253 % Total 909 %
United Kingdom 454 20.1 Netherlands 230 25.3 Japan 264 11.7 Luxembourg 127 14.0 Netherlands 238 10.6 United States 98 10.7 Canada 226 10.0 France 96 10.5 Germany 218 9.7 Switzerland 75 8.2 Switzerland 189 8.4 United Kingdom 73 8.1 France 189 8.4 Italy 47 5.1 Luxembourg 128 5.7 Austria 25 2.8 Australia 46 2.0 Japan 20 2.2 Spain 44 1.9 Sweden 18 2.0
Beugelsdijk, Brakman, Garretsen, and van Marrewijk International Economics and Business© Cambridge University Press, 2013 Chapter 2 – Getting the numbers right
c. Japan inward FDI stock d. Australia inward FDI stock Total 189 % Total 224 %
United States 75 39.7 United States 66 29.5 Netherlands 36 19.1 United Kingdom 42 18.6 Cayman Islands 17 9.0 Japan 25 11.1 France 15 8.0 Netherlands 17 7.7 Singapore 11 5.6 Switzerland 14 6.0 United Kingdom 7 3.9 Germany 10 4.2 Germany 7 3.8 France 9 4.1 Switzerland 5 2.6 Canada 7 3.1 Luxembourg 4 2.3 Singapore 7 3.1 Hong Kong 3 1.4 Hong Kong 7 2.9 Source: OECD Foreign Direct Investment Position database; German and Australian data for 2008.
Beugelsdijk, Brakman, Garretsen, and van Marrewijk International Economics and Business© Cambridge University Press, 2013 Chapter 2 – Getting the numbers rightTable 2.5 Foreign Direct Investment (FDI), stocks and flows; $ bn (%), 2011
FDI in FDI out Flows Stock Flows Stock
World 1,524 (100)
20,438 (100)
1,694 (100)
21,168 (100)
Developed economies 748 (49.1)
13,056 (63.9)
1,238 (73.0)
17,056 (80.6)
Europe 425 (27.9)
8,081 (39.5)
651 (38.4)
10,444 (49.3)
North America 268 (17.6)
4,104 (20.1)
446 (26.3)
5,170 (24.4)
Other developed ec. 55 (3.6)
870 (4.3)
140 (8.3)
1,442 (6.8)
Developing economies 684 (44.9)
6,625 (32.4)
384 (22.6)
3,705 (17.5)
Africa 43 (2.8)
570 (2.8)
4 (0.2)
126 (0.6)
Asia 423 (27.8)
3,991 (19.5)
280 (16.6)
2,573 (12.2)
Latin America 217 (14.2)
2,048 (10.0)
10 (0.6)
1,006 (4.8)
Oceania 2 (0.1)
17 (0.1)
0 (0.0)
1 (0.0)
Source: based on data from UNCTAD (2012), World Investment Report 2012; % in parentheses.
Beugelsdijk, Brakman, Garretsen, and van Marrewijk International Economics and Business© Cambridge University Press, 2013 Chapter 2 – Getting the numbers rightTable 2.6 Analytic presentation: balance of payments, 2007 (billion US dollars)
Germany USA A current account 255.53 -731.21 goods: exports fob 1,354.12 1,152.57 goods: imports fob -1,075.43 -1,967.87 balance on goods 278.69 -815.30 services: credit 214.96 493.16 services: debit -254.23 -378.11 balance on goods and services 239.41 -700.26 income: credit 318.01 817.78 income: debit -260.12 -736.03 balance on goods, services, and income 297.31 -618.50 current transfers: credit 25.43 22.33 current transfers: debit -67.21 -135.03 B capital account .24 -1.84 capital account: credit 4.75 1.8 capital account: debit -4.51 -3.65 total: groups A plus B 255.77 -733.05 C financial account -301.46 774.47 direct investment abroad -169.37 -333.27 direct investment in Germany/USA 50.94 237.54 portfolio investment assets -178.42 -294.57 portfolio investment liabilities 370.43 1,145.14 financial derivatives .. .. other investment assets -440.27 -661.89 other investment liabilities 164.39 675.02 total: groups A through C -45.69 41.42 D net errors and omissions 46.93 -41.29 total: groups A through D 1.24 0.13 E reserves and related items -1.23 -0.13 overall balance 0.00 0.00 Source IMF Balance of Payments Statistics Yearbook
Some meanings of the current account balance
1. Current account (CA) equals the value of the country's net flow of foreign investments (both private and official).
2. CA equals the difference between national saving and domestic real investment (S I).
3. CA is approximately equal to the difference (X M) implies that CA is approximately equal to the difference between domestic production of goods and services and national expenditures on goods and services (Y E).
4. Surplus current account <=> net capital (and financial) outflow
Official international reserves include financial assets denominated in readily accepted foreign currencies, the country's holdings of Special Drawing Rights (SDRs), the country's reserve position at the International Monetary Fund (IMF), and gold.
A line called "statistical discrepancy" is added to make the accounts on the BOP add to zero. It represents the net of many items that are measured incorrectly or missed (net errors and omissions).
Limitations of FDI data
• Criticizing FDI data: See Box 2.3
• FDI data are still useful when comparing groups of countries (Table 2.7)
• Significant observations about FDI flows:– FDI flows are to a large part from and to
developed economies– FDI from developing countries (emerging
economies) is on the rise
Beugelsdijk, Brakman, Garretsen, and van Marrewijk International Economics and Business© Cambridge University Press, 2013 Chapter 2 – Getting the numbers rightTable 2.7 FDI inflows and outflows, as % of total flows
Developed economies Developing economies Transition economies
Period In Out In Out In Out
1980-89
1990-99
2000-09
74.7
68.1
65.1
94.0
88.0
85.0
25.3
30.8
31.3
6.0
11.7
13.2
0.0
1.0
3.9
0.0
0.4
1.8
Source: UNCTAD
Sales and value added
• Tax havens and FDI• Value added is the “best indicator of overall or
sectoral economic significance of multinational activity” (John Dunning, 1993, p. 7)
• World Input Output Database (http://www.wiod.org/new_site/home.htm)
• Box 2.4: Transnationality index (UNCTAD) = (unweigthed average) of
foreign assets/total assets + foreign sales/total sales + foreign employment/total employment
• Table 2.9
Beugelsdijk, Brakman, Garretsen, and van Marrewijk International Economics and Business© Cambridge University Press, 2013 Chapter 2 – Getting the numbers right
Table 2.8: U.S. outward multinational activity in 2010
Ranking FDI Affiliate sales Affiliate value added 1 2 3 4 5 6 7 8 9 10
Netherlands United Kingdom Canada Luxemburg Bermuda Ireland UK Island, Caribbean Switzerland Australia Japan
United Kingdom Canada Germany Singapore Switzerland Ireland Japan Netherlands France Mexico
United Kingdom Canada Germany Japan France Ireland Australia Brazil Switzerland China
Source: BEA. The value added and sales data refer to majority owned all foreign affiliates in 2009. The FDI data reflect the direct investment position in 2010 based on a historical costs basis.
Beugelsdijk, Brakman, Garretsen, and van Marrewijk International Economics and Business© Cambridge University Press, 2013 Chapter 2 – Getting the numbers rightTable 2.9 Top 10 non-financial multinationals 2011, ranked according to TNI
Rank Corporation Home country Sector TNI*
1 Nestlé SA Switzerland Food, beverages and tobacco 96.9
2 Anglo American plc UK Mining & quarrying 93.9
3 Xstrata PLC Switzerland Mining & quarrying 93.5
4 Anheuser-Busch InBev NV Belgium Food, beverages and tobacco 92.4
5 British American Tobacco PLC UK Food, beverages and tobacco 91.7
6 Nokia OYJ Finland Electrical & electronic equipment 91.4
7 ABB Ltd. Switzerland Engineering services 91.2
8 ArcelorMittal Luxembourg Metal and metal products 90.5
9 Linde AG Germany Chemicals 90.2
10 Vodafone Group Plc UK Telecommunications 90.2
Source: UNCTAD World Investment Report 2012; * TNI = TransNationality Index
Value added export (VAX) to GDP ratio; 1995 and 2008 (%)
-10 0 10 20 30 40 50
United StatesBrazil
GreeceTurkeyJapanIndia
SpainFranceMexico
PortugalAustria
ItalyUnited Kingdom
IndonesiaRussia
CanadaPoland
South KoreaFinland
DenmarkGermany
ChinaSweden
AustraliaTaiwan
NetherlandsBelgiumHungary
Czech RepublicIreland
VAX/GDP 1995
change 1995-2008
Figure 2.7 Value added export (VAX) as a share of GDP; 1995 and 2008 (%)
Source: based on World input output Database (WIOD), see wiod.org.
Beugelsdijk, Brakman, Garretsen, and van Marrewijk International Economics and Business© Cambridge University Press, 2013 Chapter 2 – Getting the numbers rightTable 2.10: Country of origin of Global 500 between 2005-2010
Country 2005 2006 2007 2008 2009 2010 United States Japan France Germany Britain
176 81 39 37 35
170 70 38 38 35
162 67 38 37 33
153 64 39 37 34
140 68 40 39 26
139 71 39 37 29
China Netherlands Canada BRIC total Other Total
16 14 13 27 78
500
20 14 14 35 86
500
24 14 16 39 94
500
29 13 14 46
100 500
37 12 14 58
103 500
46 13 11 67 94
500
Beugelsdijk, Brakman, Garretsen, and van Marrewijk International Economics and Business© Cambridge University Press, 2013 Chapter 2 – Getting the numbers rightTable 2.11: GDP, sales and profits in 2009 (in US$ bn)
Country GDP Firm sales Firm profits
Sweden: 406
Honduras: 14.3
Walmart (1): 408
Dai Nippon Printing (500): 17
Walmart (1): 14.3
Dai Nippon Printing (500): 0.3
Beugelsdijk, Brakman, Garretsen, and van Marrewijk International Economics and Business© Cambridge University Press, 2013 Chapter 2 – Getting the numbers rightTable 2.12 Size of net capital flows; selected countries, 1870-2010
Period Arg Aus Can Fr Ger It Jap UK USA
1870-1889 18.7 9.7 7.2 2.9 1.9 1.8 0.5 4.5 1.5
1890-1913 6.2 6.3 7.6 2.3 1.4 1.9 2.2 4.5 0.8
1914-1918 2.7 7.6 3.5 3.1 - 11.7 6.6 2.9 3.5
1919-1926 4.9 8.8 2.3 1.1 2.2 4.2 2.1 2.9 1.7
1927-1931 3.7 12.8 3.6 1.8 1.8 1.5 0.6 2.0 0.8
1932-1939 1.6 3.7 1.6 3.7 0.4 0.7 1.1 1.1 0.6
1940-1946 4.8 7.1 6.5 1.8 - 3.4 1.0 7.3 1.0
1947-1959 3.1 3.4 2.3 2.0 2.0 1.4 1.3 1.2 0.6
1960-1973 1.0 2.3 1.2 1.5 1.0 2.1 1.0 0.8 0.5
1974-1989 1.7 3.7 2.6 0.8 1.9 1.4 2.0 1.4 1.3
1990-2000 2.9 4.5 2.3 1.1 1.3 1.9 2.3 1.9 1.8
2001-2010 3.3 4.9 1.8 1.1 4.6 1.8 3.4 2.3 4.6
Source: Obstfeld (1998), update Obstfeld and Taylor (2004), Table 2.2. Updated for the period 2001-2010 using World Bank Development Indicators data. Size of net capital flows measured as mean absolute value of current account as a percentage of GDP, annual data; - = data not available; Arg = Argentina, Aus = Australia, Can = Canada; Fr = France, Ger = Germany It = Italy, Jap = Japan, UK = United Kingdom, and USA = United States of America.
How is international capital mobility measured?
• Current account balance as an indicator of the degree of international capital mobility– CA surplus (deficit) net capital outflow (inflow)
• Size of net capital flows (1870-2001): Table 2.12 and Figure 2.9
Figure 2.9 Global net capital flows; average for 15 countries, 1870-2010
Net capital flows; current account (% of GDP, abs. value)
0
1
2
3
4
5
6
1870-1889
1890-1913
1914-1918
1919-1926
1927-1931
1932-1939
1940-1946
1947-1959
1960-1973
1974-1989
1990-2000
2001-2010
Source: see Table 2.11; average includes countries listed in Table 2.11 plus Denmark, Finland, the Netherlands, Norway, Spain, and Sweden.
Degree of international capital mobility: Historical perspective
• Main observations: 1. International capital mobility was already high during
1870-1914 and it is only recently that capital mobility started rising (after the significant decline that lasted until 1973)
2. There are considerable changes in the degree of international capital mobility over time which weakens the argument that ‘one of the key features of the present global economy is a high and rising degree of cross-border capital mobility.’
Figure 2.10 Capital outflows; selected countries (% of national savings
Capital outflows (% of national savings)
-10
0
10
20
30
40
50
60
1850 1860 1870 1880 1890 1900 1910year
capi
tal o
utflo
w
United Kingdom
Germany
France
United Kingdom
Source: O’Rourke and Williamson (1999).
Figure 2.11 Evolution of British and American share in foreign assets
Foreign assets; UK and USA share of total
0
0.2
0.4
0.6
0.8
1825 1850 1875 1900 1925 1950 1975 2000year
shar
e of
ass
ets
USA
UK
USA
UK
Source: see Table 2.14
Net private financial flows to emerging and developing economies; $ bn, 1992-2009
C&E Eur
CISCIS
D Asia
D Asia
L Am
SSA
-100
-50
0
50
100
150
200
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Figure 2.12 Net private financial flows to developing economies; $ bn, 1992-2009
Source: IMF, World Economic Outlook database; D Asia = Developing Asia; L Am = Latin America & Caribbean; C&E Eur = Central & Eastern Europe; CIS = Commonwealth of Independent States; SSA = Sub-Saharan Africa.
Beugelsdijk, Brakman, Garretsen, and van Marrewijk International Economics and Business© Cambridge University Press, 2013 Chapter 2 – Getting the numbers rightTable 2A.1 Overview of tax havens:
The Caribbean and Africa Europe Americas Liberia Aldernay Anguilla Mauritius Andorra Antigua and Barbados Melila Belgium Aruba the Seychelles Campione d'Italia the Bahamas Soa Tome e Principe City of London Barbados Somalia Cyprus Belize South Africa Gibraltar Bermuda Guernsey British Virgin Islands Middle East and Asia Hungary Costa Rica Bahrain Iceland Domini Dubai Ireland (Dublin) Grenada Hong Kong Ingushetia Montserrat Labuan Isle of Man Netherlands Antilles Lebanon Jersey New York Macau Liechtenstein Panama Singapore Luxembourg Saint Lucia Tel Aviv Madeira St. Kitts & Nevis Taipei Malta Saint Vincent and the Monaco Grenadines Indian and Pacific Ocean Netherlands Turks and Calcos Islands The Cook Islands Sark Uruguay The Maladives Switzerland US Virgin Islands The Marianas Trieste Marshall Islands Turkish Republic of Nothern Nauru Cyprus Niue Frankfurt Samoa Tonga Vanuatu Source: offshore business magazine (20 Sep 2006, pp. 66-7) and Tax Justice network "tax us if you can".
Beugelsdijk, Brakman, Garretsen, and van Marrewijk International Economics and Business© Cambridge University Press, 2013 Chapter 2 – Getting the numbers rightTable 2A.2 Global 500: Top 20 largest firms of the world; in US $ bn,,2010
Rank Company Country Revenues Profits
1 Wal-Mart Stores U.S. 408 14.3 2 Royal Dutch Shell Netherlands 285 12.5 3 Exxon Mobil U.S. 285 19.3 4 BP Britain 246 16.6 5 Toyota Motor Japan 204 2.3
6 Japan Post Holdings Japan 202 4.8 7 Sinopec China 188 5.8 8 State Grid China 184 -0.3 9 AXA France 175 5.0 10 China National Petroleum China 165 10.3
11 Chevron U.S. 164 10.5 12 ING Group Netherlands 163 -1.3 13 General Electric U.S. 157 11.0 14 Total France 156 11.7 15 Bank of America Corp. U.S. 150 6.3
16 Volkswagen Germany 146 1.3 17 ConocoPhillips U.S. 140 4.9 18 BNP Paribas France 131 8.1 19 Assicurazioni Generali Italy 126 1.8 20 Allianz Germany 126 6.0
Source: Fortune Global 500
The importance of distinguishing between micro and macro
1. A micro-level investment (shown on the firm’s annual accounts) does not necessarily translate into a macro-level investments (in the country’s BOP).
2. M&As are firm-level investment but are neutral from a macro perspective.
3. A multinational’s sales cannot be compared with a country’s GDP
Box 2.7Why accounting is useful but it is not explaining.
• C + M + S = I + X + C
or• S – I = X – M
This implies that the national saving surplus must be equal to the current account (CA) surplus.
However, accounting cannot explain whether
a trade deficit is good or bad or why we have
trade deficit.