The Impact of Diverging Interpretations

Session No. 6

Paper No. 1

Country: The Netherlands

Extract from:

"The Impact of Diverging Interpretations

of the Enterprise Concept"

Aimée Herczog, Hans van Hooff and Ad Willeboordse

Statistics Netherlands

Introduction

Council regulations are indispensable instruments for achieving international harmonisation of business statistics. Among these regulations, those referring explicitly or implicitly to statistical units play a key role. Firstly, there is the Regulation on Statistical Units (R-SU), listing and defining eight statistical units that are relevant for use in business statistics. Secondly, the Regulation on Statistical Business Registers demands the registration of two of these units in business registers, to be maintained by the member states.

Obviously, of the units mentioned in the R-SU, the ENTERPRISE (ENT) can be considered the core unit in the current European system of business statistics. It is the major unit to be kept in business registers and it is the building block for most of the statistical aggregates to be compiled according to the Regulation on Structural Business Statistics. It is, therefore, not surprising that all member states record ENT in their business registers and use them as observation units in their business statistics.

The acceptance of a common definition for the ENT and its wide-spread use might easily give the impression that at this point international harmonisation has been achieved. However, studies by i.a. Eurostat and Statistics Netherlands may give rise to some doubts. At least they point out that the use of the same name and even the adoption of the same definition do not guarantee a uniform interpretation and operationalization in such a way that data on industries, conceived as collections of ENT, can be meaningfully compared.

In order to find out to what extent possibly diverging use of the ENT by different member states affects statistical data and thus hampers international harmonisation, EUROSTAT requested Statistics Netherlands to carry out a comparative investigation.

This report presents the results of the study, based on comparisons referring to the ENT treatment of three member states, i.e. United Kingdom, Denmark and The Netherlands. The findings give insight in:

• the interpretation of the ENT definition by the three member states;
• the present practical implementation of the ENT definition by the three member states;
• the impact of the diverging interpretation and practices on statistical outcomes.

The structure of the report is as follows:

• Section 1 elaborates on the scope of the study and the method of comparison. With respect to the latter, it is in particular important to be aware of the meaning of comparisons over countries, in view of the fact that different countries have different legal and administrative realities (infrastructures). Indeed, these differences impose certain constraints which have to be kept in mind when evaluating the findings. A similar proviso applies with respect to representativity. The limited number of countries, industries and units involved in the study, preclude us from drawing generally valid conclusions from the study.
• Section 2 describes the way the study has been carried out. The description focuses on the way the data have been gathered and exchanged among the participating countries, as well as the way some specific problems encountered during this process, were dealt with.
• Section 3 sketches the present state of the art with respect to the position of the ENT for each of the three participating countries. Their views on the ENT definition are given, as well as the present state of affairs with respect to its implementation in the Business Register and in relevant statistics. [ANNEX 1 provides a detailed description of the profiling rules used by the countries].
• Section 4 starts with a “typology” of each of the cases involved in the study. This gives an impression of the extent to which the study covers the total field of possible situations. Then, the treatment of the cases by each of the countries is described in a more or less synoptic way, such that the differences and similarities become apparent. (Section 4 is omitted from this extract).
• Section 5 shows, for each case, the impact of the various solutions of the countries on the number and size of ENTs. (Section 5 is omitted from this extract).
• Section 6 describes the impact on the totals for the industries considered.
• Section 7 lists a number of conclusions and recommendations for future action.

For reasons of confidentiality, the individual cases are described without reference to the particular economic activities they carry out, which implies that the kind of their activities is expressed in terms of fictitious coding.

1. Methodology and Scope of the Study

Object of comparison

Following the EUROSTAT request, the ENT was chosen as the unit to which the comparisons should refer. In the Council Regulation on Statistical Units, the ENT is defined as:

the smallest combination of legal units that is an organisational unit producing goods or services which benefits from a certain degree of autonomy in decision-making, especially for the allocation of its current resources. An enterprise carries out one or more activities at one or more locations. An enterprise may be a sole legal unit.

This definition shows that the “creation” of ENTs (in the Business register) is primarily a matter of combining legal units, belonging to the same Enterprise Group (EG), in order to satisfy the condition of (a certain degree of) autonomy. In this study, the making of ENT is referred to as profiling. Divergences between countries become apparent in deviating ENT structures within a certain EG, as a result of the use of different profiling rules. The comparisons in this study therefore refer in the first instance to ENT structures within EGs and, when analysing the causes of differences, to profiling rules.

The Regulation on Business Registers mentions three units to be registered: the (non-statistical) legal unit, the local unit and the ENT. It does not explicitly mention the EG. However, from the definition of the ENT it will be clear that the EG concept, as well as the linkages between legal units within EGs, are essential for a proper understanding of the ENT definition. Therefore, also the EG will play an important role in the study.

Eventually, we are interested in the impact of diverging ENT structures on the outcomes of statistics. Therefore, in last instance the comparisons refer to the performance of industries, which are to be conceived as collections of ENT, classified according to their major activity.

Method of comparison

As stated above, the main goal of the study is to determine whether the member states interpret and use the ENT in a different way and, if so, to quantify the impact of the diverging practices on the statistical outcomes. This asks for comparison, not of concepts and their definitions, but of uses (implementation) in current practice by different countries. This means that the comparison should refer to current life cases. Ideally, for each of the countries an identical case ought to be selected, after which the different solutions (in terms of ENT structures) could be compared. In this respect, Defays[1] states that “comparison presupposes identical geographical, administrative, legal, economic and other environments”. However, different countries have different environments, and there are no identical cases: a certain business in country X does not have a exact counterpart in countries Y and Z. A theoretical solution, put forward by Defays, would be to consider all the countries and their enterprises as one population and to perform abstract operations like defining equivalence relations for the elements in this population. Such an approach is, however, beyond the scope of this study.

In the present study the comparison refers to real life cases originating from EU member states, such that the cases for country X are profiled according to the interpretations and profiling rules of both country X, Y and Z. Thus, for each case, as many solutions, i.e. ENT structures, emerge as there are countries involved. This method implies, i.a., that the profiling rules of country Y are applied on the cases of country X. In this respect it is important to stress that profiling rules are a reflection of two essentially different aspects of the ENT definition. Following Struijs[2], profiling rules reflect on the one hand the interpretation of the definition, notably its reference to autonomy, while on the other they reflect the operationalization of the definition. It is the latter which is tailored to the specific administrative and legal environment of country Y, and as these may differ from the environment in country X, one should be careful in judging differences in treatment of the cases. Indeed, such differences do not always illustrate differences in concepts. This aspect has to be kept in mind when evaluating the results of the study.

Basis for comparison

Once the cases (i.e. EG) being chosen, there are in principle several ways to determine the solutions (i.e. the resulting ENT within an EG). When country X has to provide the solution for a specific case, it can depart from:

• the situation in the Central Business Register (CBR);
• the way the case is treated in surveys, which may differ per survey, and which may differ from the CBR;
• the solution according to the official profiling rules, based on maximum information. This may differ from both the CBR and surveys for mainly two reasons:
• the official views are not (yet) complied with in CBR and/or surveys;
• the solutions in CBR and/or surveys are based on outdated, erroneous or even missing information.

In view of the goal of the study, it would be most appropriate to use the situation in the turnover and employment surveys as the reference; indeed this is closest to “reality”. However, it would be fairly difficult to let country Y profile cases on the basis of irrelevant or insufficient information provided by country X.

Taking account of the foregoing, the following approach has been decided on:

For each case, two solutions are presented (per country):

1.according to current CBR practice, and based on updated information;

2.according to official views, based on all information needed to implement these views, as intended by the Office for the nearby future.

This means that the comparisons refer to two levels: one representing the official views as anticipating on future practices and the other representing the real situation at the time of the investigation. By “official views” we do not mean “ideal theoretical concepts”, but, contrarily, the way the statistical office intends to operationalize the definition in practice. There may, however, be various reasons for the current practice at the time of the survey to deviate from these views or plans. This can be a matter of communication, misunderstanding, lack of instruction on the one hand, and of missing information needed to implement the official views on the other.

Scope and coverage

In view of the workload on the one hand and the limited time and resources on the other, scope and coverage of the study are restricted in several respects. This goes both for the number of countries involved, the number of industries covered, the number of cases and the number of variables.

countries

The study compares the situation in three countries, i.e. Denmark, United Kingdom and The Netherlands. These countries might apply rather diverging profiling rules.

variables

As the study is supposed to quantify the impact of diverging unit profiling practices on statistical outcomes, statistical variables had to be selected as well. Two variables were chosen: employment and turnover. Operation surplus, as observed by production statistics, was a candidate as well, but had to be deleted because of problems to measure this variable at the level of legal units. The latter is necessary because countries should have the possibility to define ENT at any imaginable level down to the Legal Unit level.

industries

Initially, two industry groups were selected, one in Manufacturing and one in the Services sector.
Both industries were chosen because of their substantial presence in all three countries. The industries do not show above average complex unit structures.

Section 5 provides three tables, which give insight in the size of both industries in terms of employment and turnover, as well as in their composition in terms of ENT and legal units.

units

From the foregoing it follows that, while ENT are the units to be selected and compared , it is the EGs of which the ENT make part that had to be chosen as the units to be analyzed by the countries involved in the study. After all, EGs are the universes within which ENT are to be “detected”. By taking the EG as the universe, we assume that EGs are interpreted and operationalized more or less uniformly over member states. In other words: we assume that it is not likely that country Y would be inclined to create ENT at a level surmounting the EG of country X.

The initial target was to select 12 ENT’s in both of the three countries involved in the study: 6 in one particular industry in manufacturing and 6 in one industry in the trade and services sector. All sorts of ENT were selected, i.e. not only ENT belonging to large or complex EGs, but also medium sized and less complex ones. However, no ENTs were selected , of which the EG was made up of one legal unit (LeU) only. The reference year is 1996.

Confidentiality aspects

The comparisons in this study refer - by definition - to individual businesses. If the report would confine itself to aggregates, much information which is crucial for a proper understanding of the results, would remain hidden under the surface. Therefore, comparisons are described on case level, be it in such general terms that disclosure is not possible. In particular, activity codes have been replaced by fictitious codes and figures for turnover and employment have been expressed as relative numbers, both at the level of the two industries and the individual units. Consent of participating businesses has been sought to pass information to other statistical offices.

2. Conduct of the Study

Selection and description of cases

The first action to take was the selection of the cases by each of the three countries involved in the study. This resulted in 13 EGs for the Netherlands and 8 EGs for the United Kingdom in the two industries chosen. Denmark was not able to supply EG’s, as the systematic registration of EGs will only start in the course of 1998. Therefore, Denmarks role in the project was confined to profiling EG’s from the other countries.

The Netherlands and the United Kingdom described their cases in terms of the information on the basis of which the statistician profiles its EGs according to the own profiling rules. This information referred primarily to the legal, accounting, activity and/or operational structure of EGs. These data can be said to act as the ingredients for the profiling recipe.

It should be noted that in a number of cases the information initially available appeared to be insufficient for profiling purposes. In those cases, businesses had to be contacted before profiling could start.

adding of data on statistical variables

In order to enable calculation of turnover and employment data according to all imaginable ENT-solutions, data on these variables must be available at the level of the smallest building blocks, i.e. at the level of legal units. Mostly, these data could be derived from available sources like business registers or surveys. Where this was not the case, they were collected separately from the businesses.

description of profiling rules

Apart from the case approach, each of the participating countries made an attempt to describe its profiling rules, including underlying ingredients. This was not a straightforward operation. Firstly, it turned out that comprehensive, unequivocal, objective and consistent set of unambiguous rules were not available. Secondly, during the period of investigation Denmark is in a transition phase, changing from a simple “ENT = Legal unit” structure to an approach which give more credits to the autonomy criterion. Thirdly, in The Netherlands a discrepancy was noticed between officially accepted and laid down profiling rules and current practice. These findings led to the decision to recognise two levels of rules and case solutions for Denmark and The Netherlands: official views to be implemented in the near future, and ditto case solutions, as opposed to current practice.

choice of countries to do the profiling

The cases being selected and described and the rules being defined, the question arose who would be the best fitted to take account of the profiling of the EGs of country X according to the rules of country Y res. Z. Two possibilities occur: If X himself were to do the job, this would require the exchange of profiling rules among countries. If Y res. Z were to profile the X-units, the exchange would refer to case descriptions. It was decided to choose the latter option. Main reason was that, in view of the above stated imperfect and not unambiguous nature of the rules, “borrowing” each others rules would bear more risks of misinterpretation than borrowing case descriptions.