Chapter 7 BUSINESS ACCOUNTS 1. The relationship between the firm (enterprise) and the corporation 2. The structure of corporate-sector accounts 3. From corporations to firms 7 BUSINESS ACCOUNTS CHAPTER 7 Business Accounts OECD economists are particularly interested in the institutional framework in which enterprises (firms) operate, in order to identify how to improve firms’ performance and generate an increase in employment, among other benefits. In recent OECD reports on France, for example, the authors have suggested a certain number of structural reforms intended to improve the performance of French firms. For example: ● ease the employment regulations that hinder layoffs and discriminate against small innovative units that need to be able to adjust their scale and the composition of their workforce; ● further deregulate the markets for goods and services, which remain highly regulated in France and hamper competition. The OECD economists cite the example of retail distribution, where the legislation was initially designed to prevent the large firms from wiping out the small ones, but it has on the contrary discouraged new entrants and handed over domination to a few large firms; ● improve the efficiency of the public sector, in other words general government and firms controlled by general government, which remains very large in France and partly explains the high rate of corporate tax compared with other OECD countries, acting as a brake on direct investment by foreign firms in France; and ● complete the establishment of a competitive market for network industries. Under pressure from Europe, France has liberalised its transport and telecommunications networks, but has not yet fully done so for energy. In the national accounts, firms are classified into two sub-sectors: corporations and “unincorporated enterprises” (or “individual entrepreneurs”). Individual entrepreneurs are firms, usually small in size, that do not have corporate status or do not have complete sets of accounts. They are themselves grouped with households, and in many cases the national accounts, unfortunately, do not identify them separately. The fact that they are grouped with households means that economic analysis often has to be confined to corporations, despite the fact that unincorporated enterprises also make a significant contribution to total value added. Table 1 shows the importance in terms of value added of the different institutional sectors in certain OECD countries. As can be seen from these few examples, it is the corporate sector that is the largest contributor to value added, far ahead of general government. But it can also be seen that value added for households is substantial, with much of this stemming from the imputation of output (imputed rents) for owner-occupied housing. However, a further appreciable 182 UNDERSTANDING NATIONAL ACCOUNTS – ISBN 92-64-02566-9 – © OECD 2006 BUSINESS ACCOUNTS 7 Table 1. Breakdown of gross value added by sector As a percentage of total gross value added, 2003 France Greece Netherlands Switzerland S11-S12 Corporations 60.7 32.1 70.0 71.7 S13 General government 18.0 13.7 14.0 11.5 S14-S15 Households* 21.2 54.2 15.9 16.8 S1 Total economy 100.0 100.0 100.0 100.0 * Including unincorporated enterprises and NPISHs. Source: OECD (2006), National Accounts of OECD Countries: Volume II, Detailed Tables, 1993-2004, 2006 Edition, OECD, Paris. StatLink: http://dx.doi.org/10.1787/667355442012 portion is in the form of value added of unincorporated enterprises. In particular, the fact that in Greece household value added accounts for more than 50% of total value added can be explained by the very large number of firms that do not have corporate status and are thus grouped with households in the national accounts. As for the corporations themselves, the national accounts break them down into two main sub-categories: non-financial corporations (S11) and financial corporations (S12). Financial corporations (banks, insurance companies) play a key role in the economy, but their accounts are not as easy to analyse as those of non-financial corporations, and it is for this reason that the national accounts show them separately. The definition of financial corporations can be found in Chapter 10. Table 2 shows that, in France, 56% of the total value added came from non-financial corporations in 2003. This table also shows that 9.2% of gross value added was accounted for by unincorporated enterprises, a larger figure even than that for financial corporations. Table 2. France: breakdown of gross value added by sector As a percentage of total gross value added, 2003 S11 Non-financial corporations 56.1 S14A Unincorporated enterprises 9.2 S12 Financial corporations 4.7 S13 General government 18.0 S14B “Pure” households 10.9 S15 NPISHs 1.2 S1 Domestic economy 100.0 Source: OECD (2006), National Accounts of OECD Countries: Volume II, Detailed Tables, 1993-2004, 2006 Edition, OECD, Paris. StatLink: http://dx.doi.org/10.1787/371418181211 UNDERSTANDING NATIONAL ACCOUNTS – ISBN 92-64-02566-9 – © OECD 2006 183 BUSINESS ACCOUNTS 7 1. The relationship between the firm (enterprise) and the corporation Decision-makers have always paid great attention to the small and medium-sized enterprises (SMEs). Some SMEs are not corporations as legally defined, and they are therefore not classified in the corporate sector but as unincorporated enterprises. These small units play a very important role in agriculture and the liberal professions and sometimes as “start-ups” in industry (after all, Microsoft® began life as an unincorporated enterprise). However, their contribution to total value added remains limited by the fact that as they expand, small firms tend to be transformed into corporations. It is therefore the corporate sector, particularly non-financial corporations, that provides the backbone of economic growth in most developed countries. This chapter will look first at the accounts of non-financial corporations and then return to the accounts of unincorporated enterprises. 1. The relationship between the firm (enterprise) and the corporation For the national accounts, an enterprise is an institutional unit, in other words an economic agent having independent economic decision-making power, whose aim is to produce market goods and services. The word “market” is very important; it means that the products are sold on the market at economically significant prices. One of the criteria used by national accountants to determine whether a firm sells its products at an economically significant price is to see whether the value of its sales is equivalent on a lasting basis to more than 50% of its production costs. This definition therefore excludes, for example, general government units that provide products free, or almost free. Although it is far from being based on “profit-seeking” (if a firm’s sales cover only 51% of its costs, it will have to be heavily subsidised to continue to exist), this definition nevertheless implies that the behaviour of the firm as viewed by the national accounts is not based on altruism, in contrast to general government and NPISHs. A corporation is a form of enterprise having a legal identity separate from that of its owners. This separation gives the owners the important advantage that in the event of failure of the business their responsibility toward those to whom the firm owes money is limited to the amounts they have invested in the business and does not extend to their personal assets (except in the case of an offence such as embezzlement, but that is another story). In the case of unincorporated enterprises, there is no legal distinction between the firm and its owners, and the latter are personally responsible for all debts in the event of business failure. In order to become a corporation, a firm has to submit to a certain number of legal conditions, some of them costly, and this explains why owners of very small firms do not apply for these advantages. One of the major legal requirements for corporations is the publication of a complete set of accounts recording the value of the financial and non-financial wealth at the start of the period (one talks of an “opening balance sheet”) and at the end of the period (“closing balance sheet”), as well as the receipts and payments made between these two dates. 184 UNDERSTANDING NATIONAL ACCOUNTS – ISBN 92-64-02566-9 – © OECD 2006 BUSINESS ACCOUNTS 2. The structure of corporate-sector accounts 7 The period is generally one year and often corresponds to the calendar year. These accounts are the source enabling national accountants to calculate the macroeconomic accounts of the corporate sector. By contrast, most of the unincorporated enterprises do not have complete sets of accounts. Some of the transactions cannot be separated from those of their owners in their capacity as households. It is for this reason that the national accounts include them in the household sector. Two points to note: ● Certain non-financial corporations can be wholly or partially owned by the State (or other parts of general government). These are then known as public enterprises. Even so, they are not classified under general government, since they sell their products at prices close to their real costs. There is, however, a problem for analysts in that these firms can sometimes behave differently from private corporations. For example, certain public enterprises have a so-called public service function that often prevents them from charging their customers on the basis of actual marginal cost. Since some public enterprises do not therefore carry out their production according to quite the same rules as private corporations, the SNA recommends that national accountants draw up a special account in their case. In practice, however, very few OECD countries do so. ● In principle, the crucial distinction between corporations and unincorporated enterprises as far as the national accountants are concerned is not so much their legal status but as to whether or not they publish a complete set of accounts.