Treatment of R&D flows within multinational companies

OECD task force on IPP’s

October 2008, Paris

Soli Peleg

Problem with MNC’s

• National borders are not important to MNC’s

Transactions may not be registered

Transfer of asset or transfer of service?

Performer

Domestic Parent

Group

Controlled

Affiliates

abroad

Foreign

Parent Group

Foreign

Controlled

Affiliates

Unaffiliated

foreign

residents

Performer records

User records

No records

Performer records

= User records

b

EXRD

NR NR j

EXRD, -GFCF,

-CFC

Domestic

Parent Group

a

GFCF, CFC

Record in compiling

economy

b

IMRD, GFCF, CFC

Record in compiling

economy

NR NR j

GFCF, CFC, IMRD

Record in compiling

economy

c

(1) GFCF, CFC,EXIPP

(2) EXRD,

-GFCF, -CFC

Record in compiling

economy

NR NR k

-GFCF, -CFC

(*)

Controlled

Affiliates

abroad

c

(1) IMIPP

(2) IMRD,

- GFCF,CFC

e

GFCF, CFC

NR NR k

GFCF, CFC

(*)

NR NR NR g

EXRD

Record in compiling

economy

NR

Foreign Parent

Group

NR NR NR g

IMRD

GFCF, CFC

NR

NR NR m

(1) GFCF, CFC,EXIPP

(2) EXRD, -GFCF,-CFC

l

EXRD, -GFCF,

-CFC

Foreign

Controlled

Affiliates

NR NR m

(1) IMIPP

(2) GFCF,CFC, IMRD

Record in compiling

economy

h

GFCF, CFC

Record in compiling

economy

l

IMRD, GFCF, CFC

Record in compiling

economy

d

EXRD, -GFCF, -CFC

Record in compiling

economy

f

-GFCF, -CFC

(*)

NR i

EXRD, -GFCF,

-CFC

Record in compiling

economy

NR

U

s

e

r

Unaffiliated

foreign

residents d

IMRD, GFCF, CFC

f

GFCF, CFC

(*)

NR i

IMRD, GFCF, CFC

NR

Ownership of R&D

• Ownership lies at headquarters• License payments are unusual• Users are economic owners Imports and exports are more like

transfer of asset than transfer of service

Funding of R&D

• Based on expected benefits• More or less based on expected benefits

(based on R&D intensity)• Unrelated to expected benefits

(percentage of turnover)

Funding through headquarters is not always included in funding responses

2 .Transactions in IPP's in connection with

international takeovers or mergers

Why of interest?

• International takeovers or merging of companies often involve transfers of IPP's.

• Especially in takeovers of start-up companies, the value of company taken over will reflect value of the IPP’s produced in beginning stages.

• The transfer of IPP’s in connection with the takeover is mostly not registered, only a financial transaction is recorded.

Information on takeovers, mergers

• Banking data on financial transactions.• Newspapers or other media.• Reports disseminated by market analysts.• Reports of groups of VC funds.• Once a transaction is located, cross-check

with registration in statistics – balance of payments, business registers.

Information on takeovers, mergers

• The transactions should be examined in detail and, if possible, additional information should be collected from persons involved in the transaction.

• The information gathered is used in a decision tree to decide if a sale of an IPP is involved or not.

Book value of purchased company can serve as an approximate estimate of value of company as such. Difference between value of sale and the book value, can serve as an estimate of the value of the IPP sold. If purchased company will engage in production in domestic country using the IPP, there will be use of services from the IPP. Will have be monitored in future periods.

The purchased company has developed an IPP or is at the final stages of development of an IPP

No Yes

No sale of IPP involved

Yes No

After the sale the purchasing company intends to produce products using the IPP developed.

The purchased company continues to be active in the domestic country

Yes

No The whole transaction defined as sale of IPP

The purchased company will only engage in R&D in the domestic country

The purchased company will also produce products using the developed IPP

Part of the transaction is sale of IPP, see below

Part of the transaction is sale of IPP, see below

No sale of IPP involved.