Analysis

Arrangement 1: Merchanting

Frequency by industry

Question 35 of the SIBS is first used to examine the frequency of merchanting in Canada based on the number of enterprises taking part in this global production arrangement. Table 1 shows the weighted percentage of firms who answered yes to this question in 2009 and 2012. In 2009, 2.0% of Canadian firms engaged in merchanting activities. In 2012, this increased to 5.0%.

Analysis of economic variables

Question 35 also asks for the percentage of sales attributed to the enterprise’s merchanting activities. This allows for the calculation of an estimate of total merchanting sales by exploiting the sales data from the T2 dataset.

$$\begin{array}{l}weighted merchanting sale{s}_i\\ =unweighted sale{s}_i\times SIBS final weigh{t}_i\times \% of merchanting sales\end{array}$$

where i is the individual unit.

Table 2 shows the percentage of sales attributable to merchanting activity in both 2009 and 2012. In 2009, weighted merchanting sales accounted for 1.9% of total economy-wide sales while in 2012 merchanting sales increased to 2.0% of total economy-wide. In both 2009 and 2012, merchanting made up a small yet non-negligible portion of the Canadian economy. One notable difference is the decrease in the proportion of manufacturers engaged in the activity.

Arrangement 2: Goods sent abroad for processing and factoryless goods production

Frequency by industry

As a first step in determining an estimate of companies engaged in the goods sent abroad for processing arrangement, and it’s extreme case of factoryless goods production in Canada, the constraint that the enterprise’s Head Office must be in Canada was used and the location of the enterprise’s goods production was examined using question 14 of the SIBS.

Table 3 shows that, in 2012, 38.2% of Canadian companies were goods producing with Canadian head offices. The majority of these units were found in the manufacturing sector of the economy (80.4%). 32.3% had production facilities exclusively in Canada while the remaining 5.9% of these companies had production facilities both in Canada and abroad. The goods sent abroad for processing arrangement involves companies who outsource at least some of their production activity to another country. This last figure therefore represents a potential “upper-bound” estimate of this production arrangement in Canada. Out of the Canadian companies surveyed in the SIBS, roughly 5.9% were potentially engaged in some sort of international processing arrangement in 2012. This percentage was 4.1% in 2009.

Within this estimate are those companies at the extreme end of the global processing arrangement, namely, FGPs who outsource 100% of their production abroad. An estimate of this arrangement can be obtained by only considering those companies that have head offices in Canada with production exclusively outside of Canada. The last rows of tables 3 and 4 below give an estimate of potential FGPs as being 1.9% of the Canadian economy in 2012 and 0.6% in 2009.

One main difference between the industry distribution of FGPs in 2009 and 2012 is the relatively smaller proportion of wholesale units found in 2009. In 2012, 6.5% of the wholesale units had production exclusively outside of Canada while the percentage in 2009 is too small to show due to confidentiality issues. There could be many reasons for this change including an increase in the amount of FGPs being classified as wholesalers.^Note 1

Analysis of economic variables

Linking SIBS and tax data allows for the examination of the potential size of these production arrangements with respect to various macroeconomic and financial variables. Because an accurate estimate of the goods sent abroad for processing arrangement cannot be ascertained from the SIBS dataset, this analysis will look only at the size of the assets, profits and employment numbers associated with the factoryless goods production arrangement. Before analyzing the administrative data the financial variables were weighted using the associated SIBS final weights,

$$weighted variabl{e}_i=unweighted variabl{e}_i\times SIBS final weigh{t}_i$$

where i is the individual enterprise.

When turning to companies that outsource all of their production processes, it appears that this production arrangement has increased between 2009 and 2012, although the arrangement continues to be rather small. In 2009, for instance, assets of these companies represented 0.1% of total assets while they jumped to 0.7% in 2012. Moreover, profits and employment increased from 0.2% to 2.2% and 0.2% to 2.6% respectively.

Further constraints: Considering intellectual property products in 2012

In order to be considered an FGP, the enterprise in question must own the intellectual property product associated with the output. In the analysis above, all companies with head offices in Canada and exclusively offshore production were considered to be potential FGPs. It may be the case that some of these units are not the true owners of the IPP and therefore should not be considered as part of this category. To get a better sense of the prevalence of this production arrangement in Canada a further constraint was added. As a proxy for IPP ownership, the location of research and development work was used. Only those units which reported performing research and development within Canada were deemed to own the IPP for the products they were selling and therefore were considered potential FGPs. Moreover, each company identified in section a) was further examined to determine whether or not they were truly goods producing. These extra constraints reduce the list of potential FGPs from 1.9% to 1.4% in 2012. With this further reduction, potential FGPs now make up roughly 1.5% of profits, 0.4% of assets and 1.9% of employment of the total economy in 2012.

It should be further stressed that this 1.4% of units represents an estimate of potential FGPs which can be derived from the SIBS. There could be a variety of reasons why some of these units would not be truly considered factoryless producers. Firstly, some of these companies may have production facilities in Canada despite their answers given on the SIBS which asked only about production in a specific year. Secondly, some of the units undertake FGP activities, but also have substantial wholesaling activities. It is unclear as to when such a firm should be considered a factoryless goods producer rather than a wholesaler.

Notes