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Factoryless Goods Producers (FGP)

14.77.        The Guide to Measuring Global Production introduced Factoryless Goods Producers (FGPs), defined as companies that have outsourced all aspects of the material transformation process, and provide no material inputs during that process, but that do own the intellectual property products (IPPs) involved in the production. Current accounting standards record FGPs in the distribution sector and therefore by extension treat an arrangement between a domestic principal (the FGP) and a foreign processor as a merchanting transaction in the balance of payments. However the GMGP argues that this is an unsatisfactory arrangement as it creates an arguably archaic and arbitrary distinction between material inputs and immaterial (intellectual property) inputs, while also treating pure merchanters (i.e. firms that purchase and sell finished goods) in the same way as firms that de facto control production processes and the design of goods they eventually sell. Further, it also creates an arbitrary distinction between principals that do purchase (even insignificant amounts of) material inputs, which are classified as manufacturers, and those that do not. The GMGP however was not tasked with changing international standards in the accounting system, however to mitigate their effects, the GMGP recommends that FGPs, where possible, are reflected as 'of-which items' in the accounts; which is the recommendation advocated in this chapter.

14.78.        An example of a FGP is provided in paragraphs 2.47 and 2.48 of the GMGP. A principal in country A outsources the transformation of its athletic shoe to a foreign supplier located in country B, but provides the blueprints of production, maintains ownership of the intellectual property embedded in the shoe, and is responsible for marketing and selling the shoe. The supplier purchases the materials (according to the specifications of the principal) and the principal acquires the shoe at the factory gate price that includes the materials plus the value of the processing (compensation of the production workers) but excluding any value associated with the use of IPPs in this production process. Under current accounting standards, if the principle sells these products directly to country C, the transaction is treated as a merchanting transaction in the balance of payments.

 

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