New Zealand s inward foreign affiliate statistics

Transcription

1 New Zealand s inward foreign affiliate statistics

2 Crown copyright This work is licensed under the Creative Commons Attribution 3.0 New Zealand licence. You are free to copy, distribute, and adapt the work, as long as you attribute the work to Statistics NZ and abide by the other licence terms. Please note you may not use any departmental or governmental emblem, logo, or coat of arms in any way that infringes any provision of the Flags, Emblems, and Names Protection Act Use the wording Statistics New Zealand in your attribution, not the Statistics NZ logo. Liability While all care and diligence has been used in processing, analysing, and extracting data and information in this publication, Statistics New Zealand gives no warranty it is error free and will not be liable for any loss or damage suffered by the use directly, or indirectly, of the information in this publication. Citation Statistics New Zealand (2014). New Zealand s inward foreign affiliate statistics. Available from ISBN (online) Published in July 2014 by Statistics New Zealand Tatauranga Aotearoa Wellington, New Zealand Contact Statistics New Zealand Information Centre: info@stats.govt.nz Phone toll-free Phone international

3 Contents List of tables and figures Introduction What is a foreign affiliate? Why look at foreign affiliates? Variables used in this study Caveat around identifying foreign affiliates Comparison to results from the 2005 FATS study Results of our study Foreign affiliate enterprises, employees, and origin of investment Activities and financial characteristics of foreign affiliate firms in New Zealand Profit distribution, international liabilities, and international trade Outward foreign affiliate statistics Data issues Identifying foreign affiliates Matching with Annual Enterprise Survey data Overseas trade data Non-sampled estimates and dummy companies Future work Appendix Methodology and data sources The Longitudinal Business Database (LBD) The Statistics New Zealand Business Frame The Annual Enterprise Survey Overseas Merchandise Trade data International Trade in Services and Royalties Survey

4 List of tables and figures Tables by chapter 7 Results Number of foreign affiliate enterprises and employees by industry Number of foreign affiliate enterprises and employees by country of immediate investor Foreign affiliate-owned geographic units by region as at 31 March Activity of foreign affiliate firms by industry, year ended 31 March Activity of foreign affiliate firms by country of immediate investor, as at 31 March Comparing financial ratios between foreign affiliates and domestic enterprises, year ended 31 March Profit distribution by foreign affiliates in New Zealand, year ended 31 March Overseas assets and liabilities attributed to companies in New Zealand Trade in goods and services by foreign affiliates, year ended March Figures by chapter 2 What is a foreign affiliate? Foreign affiliate flowchart

5 1 Introduction This report presents the findings of a study on foreign affiliate statistics (FATS), with a particular focus on comparing the characteristics of foreign-owned enterprises in New Zealand with those of domestically-owned firms. FATS provide information on the performance and characteristics of foreign-owned businesses in New Zealand. FATS can be inward (activities of foreign-controlled firms in New Zealand) or outward (activities of New Zealand-controlled firms abroad). This paper focuses on inward FATS, as did our report in 2005 Investigation of New Zealand s inward foreign affiliate trade statistics using existing data sources. Data in this paper is presented as at 31 March 2012, as, at the time of data extraction, this was the most recent period that all data sources were available at the same time. Statistics NZ already collects a lot of information for inward FATS as part of the calculation of gross domestic product (GDP) and the balance of payments (BoP). Foreign affiliates are considered residents of New Zealand, as they are registered in New Zealand, and pay taxes here. This means their activity and production is included in New Zealand s GDP. Similarly, when a foreign affiliate is established in New Zealand, the value of the proportion of the firm that is foreign-owned is included in foreign direct investment statistics in New Zealand s international investment position (IIP). Any profits these companies earn are recorded as debits in the balance of payments, under income earned from foreign investment in New Zealand. All other international transactions by the foreign affiliate (such as trade in goods and services) are also measured in the balance of payments. Since a lot of useful information already exists, we just need to identify foreign affiliates as a subset of total enterprises registered in New Zealand. This paper will use existing data most of which is stored on Statistics NZ s Longitudinal Business Database (LBD) 1 to identify some of the characteristics of foreign affiliate firms in New Zealand. The rest of this paper looks at what a foreign affiliate is, and covers which data variables we concentrated on, our methodology, and results. We also briefly discuss outward FATS, and the problems associated with measuring these statistics, as well as providing some further detail on data issues encountered when creating inward FATS. 1 The LBD contains unit record data that can be linked across various survey and administrative datasets using enterprise numbers. For more information on what the LBD is, and what data is available, see 5

6 2 What is a foreign affiliate? A foreign affiliate is a New Zealand firm that is more than 50 percent owned by an overseas firm. Practically, this is a firm where a single overseas investor owns more than 50 percent of the voting shares. Any subsidiaries of a foreign affiliate firm are also considered to be foreign affiliates, despite being owned by a firm based in New Zealand. For example, in figure 1, Company B is a foreign affiliate of Company A. Company C is also considered to be a foreign affiliate since Company A controls Company B, and Company B controls Company C, we can say that Company A controls Company C. Company F is the only enterprise in the diagram below that is not considered to be a foreign affiliate (this company is not controlled by Company D, so also cannot be said to be controlled by Company A). Figure 1 1 Foreign affiliate flowchart Foreign affiliate flowchart 6

7 3 Why look at foreign affiliates? Many researchers and policymakers are interested in assessing the impact of foreign investment in the New Zealand economy. Existing international investment statistics tell us that foreign investment occurs in New Zealand, but not how a company operates once it has been established in the New Zealand economy. Foreign affiliate statistics provide some of the detail that is missing from existing foreign investment statistics, and gives us a way to evaluate the impact of foreign investment, instead of just the amount. Firms with the capacity to locate some of their activities outside of their home economy are likely to be large, with better access to capital than domestic firms. Given the differences in firm size and access to investment, foreign affiliates are likely to behave differently to domestic firms. 2 Knowing how foreign affiliate behaviours and characteristics differ from those of domestic firms is useful for policy analysis and trade negotiations, particularly in relation to foreign investment. Foreign affiliate statistics are particularly relevant to New Zealand because we rely on foreign investment. Many major firms in New Zealand are branches or subsidiaries of overseas companies. For example, most of New Zealand s major banks are foreignowned. The growth of foreign affiliate activity is the result of increased globalisation of the world economy. Many companies are establishing subsidiaries in other countries to reduce labour costs, be closer to their customers, and circumvent trade barriers. It is important to monitor the performance of foreign affiliates if we want to gain a greater understanding of the phenomenon of globalisation. 3 The General Agreement on Trade in Services (GATS) recognises the need for service providers to be close to their customers. For example, an engineering firm may set up an overseas subsidiary to oversee the construction of a hydroelectric dam. This type of services trade is often referred to as commercial presence. 4 Services provided in this way can only be measured through FATS. However, in New Zealand the actual value of the services traded can be difficult to determine as existing statistics do not collect a firm s revenue earned from services separate to that from selling goods. 5 Although FATS are interesting in their own right, their full significance can only be determined by viewing them alongside statistics about the economy as a whole. For example, the proportion of people employed by foreign affiliates in the domestic economy is far more useful than just the total number of people employed by foreign affiliates. 6 This paper provides these comparisons in the results tables wherever this is possible. 2 See Fabling & Sanderson (2011). Foreign acquisition and the performance of New Zealand firms for more detail on why foreign affiliate firms tend to be larger and behave differently to domestic firms. 3 Manual on Statistics of International Trade in Services 2010 (MSITS 2010). 4 Providing services to an overseas customer by setting up a branch or subsidiary in that customer s country is also known as Mode 3 services trade. 5 Services data can be identified for a small selection of industries in the Annual Enterprise Survey, but is not available for the full enterprise population. 6 Manual on Statistics of International Trade in Services 2010 (MSITS 2010). 7

8 4 Variables used in this study In this report we look at a range of FATS variables, some of which were also covered in the 2005 study, and some that are new. Most of the variables used come from Statistics NZ s LBD (more detail on data sources can be found in the following section). The Manual on Statistics of International Trade in Services 2010 (MSITS 2010) recommends collecting at least the following FATS variables: sales (turnover) employment value added exports and imports of goods and services number of enterprises. All of these variables have been produced in this study, noting that (for simplification purposes) we have used value-added figures directly from the Annual Enterprise Survey (AES), without adjusting these to match those used in the compilation of New Zealand s national accounts and GDP statistics. The definition remains the same (that is, gross output less intermediate consumption), but both coverage and calculation differences exist. For example, some items included in national accounts outputs are not included in AES output figures since they are not accounting items. Sales have been defined as sales of goods and services, plus sales of goods not further processed from the AES (the same definition as in the 2005 study). Counting the number of foreign affiliate enterprises gives us an idea of how common these are in the New Zealand economy, while the number of employees shows the effect these businesses have on the labour market, and is also a useful proxy for the size of an enterprise. Using employee counts as a measure of size is best done within the same industries, as some industries (such as services) are more labour intensive than others. In this paper, country breakdowns for FATS are based on the location of the immediate investor rather than the ultimate investor. 7 The country of the ultimate investor is the country that ultimately controls, and therefore derives the benefit from, the investment. However, for many countries, including New Zealand, the ultimate source of investment can be difficult to determine. Statistics NZ has looked at this in the past, but this is a highly manual process so is not produced regularly. Around 20 percent of the value of foreign direct investment into New Zealand has a different ultimate investor country than immediate investor country. 8 In addition to the basic variables listed above, we also provide data on firms assets and equity, profits earned, and dividends paid to their overseas parent companies. In theory, once a population of foreign affiliate enterprises has been identified we can produce data on as many variables as exist in Statistics NZ s survey databases. This paper just looks at a small selection of these variables, using the LBD as the main data source. 7 Using the address of the first overseas parent company, for enterprises identified as having more than 50 percent foreign ownership. 8 Investor relationships can be manually traced through individual enterprises financial accounts. See Ultimate sources of foreign direct investment for results from a 2011 study. 8

9 5 Caveat around identifying foreign affiliates Foreign affiliates were mainly identified using foreign ownership indicators on the Statistics New Zealand Business Frame (BF). 9 These indicators are collected through frame update surveys, but smaller firms may not receive these surveys (or receive them infrequently). This means it is possible that foreign affiliate firm numbers may be incorrect, but this will have a negligible impact on the other indicators presented in our tables. Given that these ownership indicators are not updated as frequently for smaller firms, we could be including firms that were foreign-owned when added to the BF, but not foreign owned as at 31 March We could also be excluding firms that were not foreign owned when they were first added to the frame, but became foreign owned at a later date. However, larger firms will have such indicators updated more frequently, so employee counts, total assets, etc of foreign affiliates are likely to be an accurate representation of the entire foreign affiliate population in New Zealand. 9 Note that the Business Frame has now been replaced by the Business Register. 9

10 6 Comparison to results from the 2005 FATS study It is natural to want to compare results published in this paper with those published in However, you should exercise caution when doing so, as most results have not been compiled on the same basis. The 2005 study identified 3,779 enterprises as foreign affiliates operating in New Zealand. We have improved our methods used to identify foreign affiliate enterprise since then, and when we re-extract a foreign affiliate population as at 31 March 2005 we get 4,556 enterprises. However, we are confident that the most significant foreign affiliates (in terms of employee counts, total turnover etc.) were correctly identified in For example, we see a 9.3 percent increase in the number of people employed by foreign affiliates in New Zealand between 2005 and Total employees in the New Zealand economy increased 3.0 percent over the same time. Financial information has also been compiled on a different basis in this paper compared to In 2005, we only included data from firms that reported both financial performance and financial position information in the AES. However, this two-wave structure of the AES was ceased in 2009, so this paper includes AES data on financial performance and financial position for all firms. 10 This means that we cannot compare the total assets (for example) owned by foreign affiliates between the two papers, as we only reported data for those foreign affiliates appearing in both waves of the AES in To make comparisons even more difficult, industry classifications have been updated since In 2005 data was compiled under the 1996 version of the Australian and New Zealand Standard Industrial Classification (ANZSIC96), while data in this paper is compiled under ANZSIC06. One of the main changes between the two classifications is the application of the production function concept. This means that ownership does not determine the industry classification, but the primary activity of the enterprise determines the industry instead. Government-owned departments are one of the main groups of enterprises affected by this change. For example, total turnover by the Government Administration and Defence industry (ANZSIC96) was $7,501 million in In comparison, total turnover for the Public Administration and Safety industry (ANZSIC06) was $46 million in Entities are now classified according to what they do, rather than by who owns them. See Major changes from ANZSIC 1996 for more information on the differences between the two latest industry classifications. 10 Only 30.9 percent of identified foreign affiliates reported both financial performance and financial position data in the 2005 study (which used data from the 2003 AES). 10

11 7 Results of our study As mentioned in earlier sections, the majority of the following results are taken from data available on the Longitudinal Business Database (LBD). However, the dataset has undergone some manual cleaning, which is discussed further under the data issues section of this paper. The timing of this report meant that we had to use data as at 31 March This ensured that all data sources matched at the same point in time. See appendix 1 for more information on data source methodology and release times. The following tables focus on comparing the characteristics of foreign affiliate enterprises with those of the economy as a whole. 7.1 Foreign affiliate enterprises, employees, and origin of investment From table 1, we can see that as at 31 March 2012 we identified 461,905 enterprises on the Statistics New Zealand Business Frame. 11 Of these, 6,667 (1.4 percent) were identified as foreign affiliates of overseas firms. 12 However, these foreign affiliate firms employ 15.4 percent of total employees, suggesting that in general, foreign affiliate firms employ greater numbers of staff compared to New Zealand-owned enterprises. Taking employee counts as a proxy for firm size, this confirms that foreign affiliates tend to be significantly larger than New Zealand-owned firms. This holds true for all industries, except for firms in the education and training industry. 13 Foreign affiliate firms tend to make up a small proportion of total company numbers, but much higher proportions of employees. The mining industry stands out as the exception, in that 19.6 percent of enterprises in this industry are foreign owned. This may be related to the large start-up costs associated with setting up a mining operation, and foreign owned firms are likely to have better access to capital in order to fund such a project. Foreign affiliates in the financial and insurance industry employ the greatest proportion of people compared to total employment, with 69.3 percent of employees in this industry belonging to a foreign affiliate. The main reason for this is that most of New Zealand s major banks and insurance companies are foreign owned, and these companies have many branches and offices across New Zealand. The proportion of foreign affiliate enterprises to total enterprises may seem lower than expected. This is because total enterprises will include sole traders and partnerships, which are almost entirely domestically owned. For example, each farm in New Zealand will be counted as a single enterprise in table This includes only enterprises that were live at this time, as well as being economically significant. Enterprises can move in and out of economic significance multiple times during a year. 12 See caveat in section 5 firm counts are not full coverage. 13 This reflects the high level of government ownership in this sector, and the fact that schools and universities tend to be larger than privately owned educational institutes (such as language schools). 11

12 New Zealand s inward foreign affiliate statistics Table 1 1 Number of foreign affiliate enterprises and employees by industry Number of foreign affiliate enterprises and employees by industry Industry Number of foreign affiliates Number of employees (FATS) Total number of enterprises Total number of employees Percentage of FATS enterprises to total Percentage of FATS employees to total Agriculture, forestry and fishing 313 1,592 70,257 90, Mining 120 2, , Manufacturing ,746 20, , Electricity, gas, water and waste services 24 2,234 1,003 14, Construction ,561 48, , Wholesale trade 1,576 31,770 16,159 93, Retail trade ,246 25, , Accommodation and food services ,987 18, , Transport, postal and warehousing ,083 14,194 81, Information media and telecommunications ,264 4,867 31, Financial and insurance services 1,092 38,921 27,759 56, Rental, hiring and real estate services 704 3,454 94,618 24, Professional, scientific and technical services ,610 49, , Administrative and support services ,661 14,831 88, Public administration and safety 12 3,362 1, , Education and training , , Health care and social assistance 86 6,621 16, , Arts and recreation services ,299 34, Other services 76 3,402 20,974 61, Total all industries 6, , ,905 1,808, Table 2 provides a breakdown of foreign affiliate enterprises by the country of the immediate investor. Many firms are owned by other companies; these are called parent companies. In a company structure, an immediate investor is the firm that directly owns the firm below it. After following the chain of ownership to the top you find the ultimate investor. A company s ultimate investor is the firm that owns the entire group and is not owned by another company in turn. Australia is the immediate source of investment for 38.1 percent of foreign affiliates in New Zealand, with the United States the next largest owner of foreign affiliates (11.2 percent). New Zealand s geographic proximity to, and close economic relationship with, Australia means that most foreign direct investment comes from there. Note that the number of foreign affiliates owned by Australian firms would be smaller if we could identify a firm s ultimate investor instead of just the immediate investor. For example, it is fairly common for multinational companies to use regional offices in Australia to establish firms in New Zealand. 12

13 New Zealand s inward foreign affiliate statistics Table 2 2 Number of foreign affiliate enterprises and employees by country of immediate investor Number of foreign affiliate enterprises and employees by country of immediate investor as at 31 March 2012 Country of immediate investor Number of foreign affiliates Number of employees (FATS) Australia 2, ,891 British Virgin Islands Canada 75 1,953 China 48 1,848 Denmark 35 3,299 France 87 5,824 Germany 190 7,787 Hong Kong 54 1,330 Japan ,136 Malaysia 40 3,772 Netherlands ,276 Singapore 158 5,940 Switzerland 139 7,648 United Kingdom ,870 United States of America ,247 Country unknown (1) 1,413 2,379 Other countries ,030 Total all countries 6, , These enterprises have no country of ow nership information on Statistics New Zealand's Business Frame. Note that some of these companies may be incorrectly identified on the Business Frame as being foreign-ow ned. Table 3 provides a regional breakdown of where foreign affiliates have established a presence in New Zealand. This data has been compiled using address fields on geographic units from the Statistics New Zealand Business Frame. Note that a geographic unit is different to an enterprise. For example, ASB Bank Ltd is an enterprise; while a local ASB branch where people do their everyday banking would be a geographic unit of this enterprise. Unsurprisingly, most foreign affiliates geographic units can be found in the regions that are home to New Zealand s largest cities (Auckland, Wellington, and Christchurch). Together, the Auckland, Wellington, and Canterbury regions are home to almost twothirds of all foreign-controlled geographic units in New Zealand. As well as having the largest number of foreign-owned geographic units, Auckland is also where people are most likely to be employed by a foreign-owned unit. Just over 20 percent of all people working in Auckland as at 31 March 2012 were employed by a foreign-owned firm. You are least likely to be employed by a foreign-owned firm if you work in the Tasman region. 13

14 New Zealand s inward foreign affiliate statistics Table 3 3 Foreign affiliate-owned geographic units by region as at 31 March 2012 Foreign affiliate-owned geographic units by region as at 31 March 2012 Region Number of foreign-owned units Percent (1) Percentage of total units that are foreignowned Percentage of total employees working in foreignowned units Northland Auckland 5, Waikato Bay of Plenty Gisborne Hawke's Bay Taranaki Manawatu-Wanganui Wellington 1, Tasman Nelson Marlborough West Coast Canterbury 1, Otago Southland Area outside region Total 13, This is the percentage of foreign-ow ned geographic units located in each region not the percentage of total geographic units that are foreign-ow ned in each region. 7.2 Activities and financial characteristics of foreign affiliate firms in New Zealand The following data tables have been constructed using data from the 2012 AES. Table 4 compares turnover, value added, assets, and equity by industry for foreign affiliates and for domestically-owned enterprises, while table 5 looks at which countries are the immediate owners of foreign affiliate assets and equity. Table 6 compares financial ratios across industries, where we can see if foreign affiliates tend to perform better in some industries than others. As mentioned earlier, turnover has been defined as sales of goods and services, plus sales of goods not further processed. Foreign affiliates contribute 25.3 percent of total turnover, and 26.8 percent of value added in the New Zealand economy, despite only making up around 1.4 percent of total enterprises. Most of the sales revenue earned by foreign affiliates was by companies in the wholesale trade and manufacturing industries, which is similar to what we see when we look at domestic firms. 14

15 New Zealand s inward foreign affiliate statistics Firms in the manufacturing industry also added the most value to their outputs, both for foreign affiliates and New Zealand-owned firms. The second-largest source of value added for foreign affiliates is the financial and insurance services industry, whereas this industry represents only the thirteenth largest source of value added for the entire economy. Most large companies in the financial and insurance services industry are foreign-owned. Some industries, such as the public administration and safety, and health care and social assistance industries, can have negative value-added. This represents the fact that services provided by these industries are mostly free, or below cost, but there is still intermediate consumption associated in providing these services. Note that the National Accounts use a different approach to estimate the value added provided by these industries to account for the lack of market prices in the provision of these services. Table 4 4 Activity of foreign affiliate firms by industry, year ended 31 March 2012 Activity of foreign affiliate firms by industry, year ended 31 March 2012 Industry Turnover (sales) Foreign affiliates Value added Assets Equity Turnover (sales) Domestic enterprises Value added Assets Equity Agriculture, Forestry and Fishing 1, ,691 3,425 28,060 10, ,909 66,400 Mining 3,887 2,318 21,004 4,113 2,732 1,142 6,476 3,284 Manufacturing 30,508 8,263 28,594 14,126 58,108 14,268 41,479 19,509 Electricity, Gas, Water and Waste Services , ,552 5,474 58,081 30,959 Construction 3,410 1,276 2, ,736 8,982 17,366 5,594 Wholesale Trade 28,371 3,724 14,658 6,083 46,295 6,037 19,003 6,239 Retail Trade 11,168 1,662 4,617 1,354 41,683 7,034 15,710 5,455 Accommodation and Food Services ,601 1,087 3,053 3,207 8,254 3,590 Transport, Postal and Warehousing 1, , ,116 7,840 29,427 15,192 Information Media and Telecommunications 1,219 1,681 5,450 1,990 1,239 3,558 18,434 7,443 Financial and Insurance Services 2,846 7, ,461 93,202 2,105 2, , ,608 Rental, Hiring and Real Estate Services ,430 1,973 3,680 10, ,126 70,039 Professional, Scientific and Technical Services 459 2,076 10,330 2,538 2,297 11,237 44,105 16,899 Administrative and Support Services 217 1,145 1, ,035 2,622 5,018 2,135 Public Administration and Safety C C 393 C C C 87,290 C Education and Training , ,868 12,082 Health Care and Social Assistance 1 C ,665 C 18,314 9,071 Arts and Recreation Services C C C 1,636 10,790 C Other Services ,815 2,300 9,805 7,028 Total all industries 86,667 34, , , ,961 92, , ,922 Symbol: C confidential Foreign affiliates tend to have more assets than New Zealand firms, owning 44.4 percent of assets across all industries. However, if we exclude the financial and insurance services industry (which holds 85.5 percent of all assets owned by foreign affiliates), foreign affiliates hold a similar proportion of assets as their share of employment. 14 Table 5 reconfirms Australia s importance as a source of foreign investment in New Zealand. Australian-owned foreign affiliates contribute 40.0 percent of turnover and 50.0 percent of value added by all foreign affiliates. In addition, these companies also own 79.0 percent of all foreign affiliate-owned assets in New Zealand, mainly because most major banks in New Zealand are Australian owned. 14 There could be some double counting of assets if firms are reporting intercompany loans in the AES. However, previous work has found that few firms report these, so this is unlikely to be a significant issue. 15

16 New Zealand s inward foreign affiliate statistics Table 5 5 Activity of foreign affiliate firms by country of immediate investor, as at 31 March 2012 Activity of foreign affiliate firms by country of immediate investor, year ended 31 March 2012 Country of immediate investor Turnover (sales) Value added Assets Equity Australia 34,638 16, ,166 87,712 Austria , Bermuda C C 1, Canada 1, ,219 1,823 China 1, ,191 1,934 France 2, ,167 2,604 Germany 2, ,713 2,078 Japan 6,184 1,347 10,598 3,955 Liberia C C 1, Malaysia , Netherlands 3,324 1,850 61,118 11,502 Singapore 3, ,531 2,046 Switzerland 1, , United Kingdom 7,338 3,063 15,075 3,420 United States of America 14,027 4,852 26,769 10,617 Country unknown , Other countries 5,031 1,485 7,751 2,533 Total all countries 86,667 34, , ,368 Symbol: C confidential We can use the financial ratios in table 6 to compare the performance of foreign affiliate firms against total firms in New Zealand. A company s return on equity provides an indication of how much profit they are earning on each dollar that shareholders have invested. Return on total assets can indicate how effective a company is at turning investment (both debt and equity) into profit. A company s debt/equity ratio is an indication of how much it relies on borrowing compared to shareholder investment. These ratios will vary across industries, as well as by firm characteristics. Table 6 shows us there are differences between foreign affiliates and domestic firms across a number of industries, suggesting that foreign affiliates perform better in some industries than others. Note that there were a number of large losses reported during the March 2012 year. This included losses reported by insurance companies due to claims received after the Canterbury earthquakes, as well as losses related to writing down the value of assets owned. The largest one-off losses were reported in the following industries: Financial and insurance services Transport, postal and warehousing 16

17 New Zealand s inward foreign affiliate statistics Information media and telecommunications Public administration and safety Foreign affiliates have their highest return on equity (27.7 percent) in the mining industry, and their lowest return on equity (-26.3 percent) in the information media and telecommunication industry. Meanwhile, figures for domestic firms showed the highest return on equity (50.5 percent) in the construction industry, and their lowest return on equity (-4.2 percent) in the transport, postal, and warehousing industry. The negative returns for foreign affiliates in the information media and telecommunication industry are driven by a single enterprise significantly writing down the value of its assets during the March 2012 year. Excluding this enterprise, foreign affiliates in this industry had returns on equity of 12.0 percent, and returns on assets of 5.3 percent. Overall, there doesn t seem to be a difference in returns on equity for foreign affiliates and domestic firms. Foreign affiliates do (on average) have lower returns on assets than New Zealand firms though, mainly because foreign affiliates have higher levels of assets. At a total level, foreign affiliates have higher debt levels than all New Zealand firms, as measured by debt to equity ratios (calculated as assets minus equity, divided by equity). Due to their size, and close relationship with overseas parents, foreign affiliates may have better access to debt financing than domestic firms, which is why they generally have higher debt to equity ratios. Financing a firm using debt rather than equity may have taxrelated benefits as well. 15 Table 6 6 Comparing financial ratios between foreign affiliates and domestic enterprises, year ended 31 March 2012 Comparing financial ratios between foreign affiliates and domestic enterprises, year ended 31 March 2012 Industry Return on equity Foreign affiliates Return on Debt/equity total assets ratio Return on equity Domestic enterprises Return on Debt/equity total assets ratio Agriculture, Forestry and Fishing 7.7% 3.9% % 3.2% 0.9 Mining 27.7% 5.4% % 2.8% 1.1 Manufacturing 13.5% 6.7% % 7.2% 1.1 Electricity, Gas, Water and Waste Services 18.3% 4.4% % 3.3% 0.9 Construction 21.7% 7.0% % 16.3% 2.1 Wholesale Trade 16.5% 6.9% % 12.5% 2.0 Retail Trade 24.1% 7.1% % 13.8% 1.9 Accommodation and Food Services 15.7% 6.6% % 7.1% 1.3 Transport, Postal and Warehousing 16.0% 6.4% % -2.1% 0.9 Information Media and Telecommunications -26.3% -9.6% % 4.9% 1.5 Financial and Insurance Services 9.7% 1.4% % 6.0% 1.5 Rental, Hiring and Real Estate Services 9.5% 2.5% % 3.4% 1.3 Professional, Scientific and Technical Services 22.4% 5.5% % 17.4% 1.6 Administrative and Support Services 23.5% 9.2% % 16.3% 1.4 Public Administration and Safety 2.8% 1.8% % -0.5% 1.2 Education and Training 3.7% 0.6% % 3.2% 0.3 Health Care and Social Assistance 21.8% 8.5% % 11.9% 1.0 Arts and Recreation Services -10.0% -1.1% % 8.4% 0.4 Other Services 16.9% 7.5% % 9.0% 0.4 Total all industries 11.0% 1.9% % 5.4% See Fabling, Gemmell, Kneller, and Sanderson (2013). Estimating firm-level effective tax rates and the user cost of capital in New Zealand for more detail on the impact of firms debt/equity structures on their tax rates. 17

18 New Zealand s inward foreign affiliate statistics 7.3 Profit distribution, international liabilities, and international trade One of the main issues surrounding foreign control of New Zealand firms is what happens to their profits are most profits earned by foreign owned firms taken offshore? Table 7 provides a snapshot of what happened to profits earned by foreign affiliates during the March 2012 year. Profits can either be paid out as dividends, or reinvested back into the company. If shareholders are overseas, then any dividends paid represent profits flowing out of the country. Note that dividend payments occur at the whim of each company, so can be irregular. Table 7 shows what foreign affiliates did with their profits across the various industries. This analysis can also be done on a country breakdown (and we have looked at Australian-owned companies in more detail before). See New Zealand s direct investment with Australia: How the global financial crisis affected profits and reinvestment. During the March 2012 year, foreign affiliates earned net profits of $14.7 billion (22.0 percent of net profits earned by all New Zealand companies), paying $8.6 billion of these as dividends to their overseas owners. As mentioned in the previous sub-section, profits were affected by insurance-related losses during the year, as well as large, one-off asset revaluations (particularly in the information media, and telecommunications industry). Firms in the transport, postal, and warehousing industry, and financial and insurance services industry were most likely to send their profits offshore, paying 75.3 percent and 66.2 percent of their profits out as dividends to overseas shareholders respectively. Most of the dividends paid by companies in the financial and insurance services industry will end up in Australia, as this is where ownership of our major banks lies. Of the industries whose firms earned significant profits (more than $100 million) during the year, the administrative and support services industry, and accommodation and food services industry were most likely to reinvest profits back into their business. 18

19 New Zealand s inward foreign affiliate statistics Table 7 7 Profit distribution by foreign affiliates in New Zealand, year ended 31 March 2012 Profit distribution by foreign affiliates in New Zealand, year ended 31 March 2012 Industry Net profit Dividends paid to overseas investors Percentage of profits paid to overseas investors Agriculture, forestry and fishing Mining 1, Manufacturing 1,907 1, Electricity, gas, water and waste services Construction Wholesale trade 1, Retail trade Accommodation and food services Transport, postal and warehousing Information media and telecommunications Financial and insurance services 9,003 5, Rental, hiring and real estate services Professional, scientific and technical services Administrative and support services Public administration and safety C C C Education and training 1 C C Health care and social assistance Arts and recreation services C C C Other services Total all industries 14,675 8, Symbol: C confidential Table 8 shows a breakdown of the value of international assets and liabilities held by foreign affiliates compared to all New Zealand companies. Note that data in this table will not match published totals for the value of New Zealand s international assets and liabilities as table 8 excludes data entered under dummy enterprises 16, as well as nonsampled estimate data. Note that only data sources used to compile tables 8 and 9 feature the use of dummy enterprises. Foreign affiliates in the financial and insurance services industry hold the majority (64.9 percent) of New Zealand s total international liabilities. Most of this is held by New Zealand banks and includes borrowing from their Australian parents. This related party debt is considered less risky than debt owed to unrelated parties, as it is likely to be easier to rollover (refinance) this debt. 16 Fictional enterprises created so that Statistics NZ can enter administrative data, modelled data, and other estimates as if the data had been collected through a survey. For example, tax data from Inland Revenue is entered into a dummy enterprise in the quarterly international investment survey, as the transactions represent a summary of real world transactions that we cannot assign to individual enterprises. 19

20 New Zealand s inward foreign affiliate statistics Table 8 8 Overseas assets and liabilities attributed to companies in New Zealand Overseas assets and liabilities attributed to companies in New Zealand, as at 31 March 2012 Foreign affiliates Domestic enterprises Industry Assets Liabilities Assets Liabilities Agriculture, Forestry and Fishing 40 2, Mining 235 1, Manufacturing 705 7,716 1, Electricity, Gas, Water and Waste Services C 140 C 4,420 Construction Wholesale Trade 802 4, Retail Trade Accommodation and Food Services C 859 C 2 Transport, Postal and Warehousing ,378 Information Media and Telecommunications ,233 Financial and Insurance Services 53, ,328 45,477 23,335 Rental, Hiring and Real Estate Services 110 2, Professional, Scientific and Technical Services 106 4,519 6,552 2,938 Administrative and Support Services C 747 C -77 Public Administration and Safety ,379 43,203 Education and Training C C C C Health Care and Social Assistance C 204 C C Arts and Recreation Services C C C C Other Services C C C C Total all industries 55, ,466 90,135 77,992 Symbol: C confidential Table 9 shows us the proportions of overseas trade conducted by foreign affiliates compared to total New Zealand firms. Given that foreign affiliates are likely to be large firms with connections spanning multiple countries, it s not surprising that they make up a significant proportion of our goods and services trade. Many foreign-owned companies in New Zealand will import services from their overseas parents, usually as management fees. In addition, many foreign affiliates pay royalties to overseas firms for the use of computer software and brand names. Compared to imports of goods and services, and exports of services, foreign affiliates are responsible for a relatively small part of New Zealand s goods exports. This is largely because New Zealand s goods exports are dominated by dairy products, which are produced by New Zealand owned firms. 20

21 New Zealand s inward foreign affiliate statistics Table 9 9 Trade in goods and services by foreign affiliates, year ended March 2012 Trade in goods and services by foreign affiliates, year ended March 2012 Exports of goods Exports of services Imports of goods Imports of services $NZ millions All enterprises (1) 43,929 3,688 41,172 4,713 Foreign affiliates 10,944 1,611 23,740 2,517 Percentage of trade by foreign affiliates Matching merchandise trade data to enterprises is not perfect, so totals in this table w ill not match the actual total trade values. See section 9.3 in this paper for further details. Note that table 9 only includes services data that is collected through our international trade in services and royalties survey (ITSS). This means services totals in table 9 exclude travel, transportation, insurance, and government services, as these service types cannot be assigned to individual enterprises using existing data. See the data sources section for more detail on the ITSS. 21

22 8 Outward foreign affiliate statistics This paper focused on inward FATS, as these figures can be compiled using data that is collected as part of calculating New Zealand s GDP. However, many data users, especially trade negotiators, are also interested in outward FATS. Outward FATS represent the activities of New Zealand-owned firms operating in other countries. Trade negotiators are particularly interested in the revenue these firms earn from providing services to consumers in their host countries, as services trade negotiations are based on the GATS. Under the GATS, there are four recognised modes that a New Zealand company can use to provide a service to an overseas consumer: Cross border supply (Mode 1) supplying a service via mail, phone, , or other electronic means. For example, a law firm may provide legal advice to an overseas client over the phone. Consumption abroad (Mode 2) delivering a service to an overseas customer who is temporarily in New Zealand. Tourist activities are the most common example of Mode 2 services supply. Commercial presence (Mode 3) supplying a service to an overseas customer through commercial presence in the customer s country. That is, setting up a subsidiary in that country to provide a service. Presence of natural persons (Mode 4) service delivered by a New Zealand employee sent overseas temporarily. For example, an employee of a New Zealand IT firm sent overseas to provide IT services. Mode 3 services supply under GATS focuses on the value of services provided to overseas customers by New Zealand-owned companies abroad. Existing balance of payments and GDP statistics include exports of services conducted via Modes 1, 2, and 4, but exclude Mode 3 trade as this does not occur in our economy. According to the GATS, we do not have a complete picture of New Zealand s service exports without including Mode 3 exports as well. Mode 3 exports of services form part of outward FATS, which focus on the characteristics and behaviour of this company as well their services trade. This data is very difficult to measure, as the enterprises involved do not operate in New Zealand, and as such, are not subject to the same data reporting requirements that New Zealand based enterprises are. However, some countries (such as Australia) have attempted to measure outward FATS in the past, with varying levels of success. 17 Collecting outward FATS is often an expensive and timeconsuming exercise that places a lot of burden on responding companies. Outward FATS information will be captured by the national statistics agencies of the countries in which these subsidiaries operate, as part of their GDP calculations. What this means is that one country s inward FATS are another s outward FATS. If the countries where the majority of New Zealand-owned firms are located created inward FATS data, and this data was able to be shared across statistics agencies, then we could (theoretically) begin to build a picture of outward FATS as well. However, New Zealandowned firms will not make up a significant part of any overseas country s GDP (except for Australia), so data is unlikely to be available, even if data-sharing was an option. 18 We will continue to monitor our available options for estimating outward FATS, but these figures will not be produced in the near future. 17 Results and methodological information from Australia s most recent attempt to estimate outward FATS can be found here : 18 New Zealand would probably form part of an other countries category for most economies, and confidentiality restrictions would prevent unit-record data sharing. 22

23 9 Data issues We encountered a number of issues while compiling inward FATS data for this paper. A number of these issues and features of the dataset are explained in more detail below: 9.1 Identifying foreign affiliates Being able to identify foreign affiliates operating in New Zealand relies on accurate ownership and corporate structure information on the BF. Items such as the overseas ownership indicator and address fields on the BF are updated as regularly as possible, but it is unlikely that the foreign affiliate population used in this paper is 100 percent accurate. However, most significant enterprises will have been identified and included. Limitations associated with the available indicators for identifying foreign affiliates mean that there is a likely under coverage of small firms. This means that results for total assets, employee counts and so on will be more robust than firm counts. As mentioned in section 5 of this paper, there were a significant number of enterprises identified as foreign affiliates, for which we could not identify the country of ownership. 19 The largest of these companies were manually updated. In addition, the initial population included some enterprises that were not located in New Zealand, which had to be removed. However, spelling errors in the address field meant we could not simply extract only companies whose address was in New Zealand. For example, New Xealand, NZ, and Auckland were common entries in the country field of a firm s address Matching with Annual Enterprise Survey data The population of interest for this paper was all enterprises who were economically significant and live as at 31 March Annual Enterprise Survey (AES) data included approximately 17,000 enterprises that were live and economically significant at some point during the March 2012 year, but did not meet those requirements as at 31 March This means that results related to AES data in this paper will not match results published as part of the 2012 AES information release. 9.3 Overseas trade data Overseas merchandise trade data is collected from New Zealand Customs information, and matched to enterprises using GST numbers. This matching process is supplemented by manual matching processes based on company names and addresses. Due to a match being made using GST numbers, exports and imports of goods can be assigned to a company that no longer exists (and was therefore not extracted as part of the population of enterprises operating as at 31 March 2012). For example, a company can be restructured and get a new enterprise number on the BF. However, if the Customs client codes and GST numbers associated with the new enterprise are not updated, trade will still be matched to the original enterprise. In this case, no match would be found for exports by the original enterprise as they are no longer live on the BF. We used company names and addresses to manually match significant exports and imports assigned to ceased companies. This information will also be used to improve the future matching process. 19 Without manually looking up shareholder information on the Companies Office website for each firm. 20 Note that the address on the BF is not necessarily the same as the country of ownership. For example, New Zealand-based firms could use an Australian parent company as a contact address. 23