Non-financial corporations - statistics on profits and investment


Data extracted in May 2018.

Planned article update: May 2019.

Highlights

In 2016, non-financial corporations in the EU had a higher profit share (40.0 %) and investment rate (22.7 %) than the United States (32.4 % and 18.0 % respectively).

Business profit shares varied between 71.7 % and 31.9 % across the European Union in 2016.

Business investment rates varied between 38.5 % and 16.7 % across the European Union in 2016.

Gross investment rate of non-financial corporations, 2016

This article focuses on investment and the distribution of profit for non-financial corporations in the European Union (EU) and the euro area; note there are complementary articles that provide information for financial assets and liabilities for non-financial corporations and for income, saving and investment for households.

The non-financial corporations sector comprises all private and public corporate enterprises that produce goods or provide non-financial services to the market.

This article presents Eurostat statistics derived from European sector accounts, which form part of the European system of national and regional accounts (ESA 2010). Data are provided for the EU-28 and the euro area, as well as for individual European Union (EU) Member States, three EFTA countries, Turkey and the United States for the latest reference year available and for developments over the previous 10 years. Most indicators are presented in relation to gross value added, which is beneficial for making spatial comparisons, especially between Member States or non-member countries of different sizes.

Full article

Profit shares: distribution of value added

Figure 1 shows the breakdown of value added: value added is the value generated by the production process. A part, normally small, of the value added is used to pay taxes on production (less subsidies). The remainder — in fact nearly all — of value added is used to reward the supply of labour and capital, referred to in national accounts terms as the compensation of employees and gross operating surplus, the latter being a measure of profit (before taxes on income and wealth); gross operating surplus may include the remuneration of self-employed persons in countries where the self-employed are included in the non-financial corporations sector.

In this article the profit share is defined as gross operating surplus divided by gross value added. As such, this profitability indicator shows the proportion of the value added by non-financial corporations during the production process which remunerates the supply of capital (or is taxed). Different profit shares in different economies can be explained by a number of factors, such as the relative importance of labour or capital-intensive industries, labour productivity and the level of labour costs. In 2016, profit shares were slightly lower in the EU-28 (40.0%) than in the euro area (40.8 %), with both of these values being above the profit share in the United States (32.4 %).
Figure 1: Analysis of value added of non-financial corporations, 2016
(% share of gross value added)
Source: Eurostat (nasa_10_nf_tr)

Among the five largest EU economies, Spain (42.7 %), Italy (42.4 %) and Germany (41.5 %) had profit shares for non-financial corporations above the EU-28 average in 2016, whereas the profit share of the United Kingdom (35.4 %) was below the average as was that of France (31.9 %) which was in fact the lowest share recorded among all EU Member States (note that no data are available for Croatia). In Lithuania, the Czech Republic, Greece, Romania (2015 data) and Malta, the gross operating surplus of non-financial corporations represented more than 50 % of the gross value added created during the production process, with this share reaching as high as 71.7 % in Ireland mainly due to large foreign-owned multi-national companies that only pay a small proportion of their wages in Ireland; a high profit share was also observed in Turkey (61.4 %; 2015 data).

A time series of profit shares between 2006 and 2016 is provided in Table 1 of the annex at the end of this article.

Profit shares between 2006 and 2016

Figure 2 shows the absolute changes in profit shares for non-financial corporations between 2006 and 2016. This time span starts just before the onset of global financial and economic crisis (and therefore was close to a peak in the business cycle in most EU Member States) and runs until the latest year for which data are available.
Figure 2: Changes in profit share of non-financial corporations, 2006-2016
(percentage points)
Source: Eurostat (nasa_10_nf_tr)

In the EU-28 and the euro area, profit shares of non-financial corporations were just less than 1.0 percentage points lower in 2016 than they had been in 2006, down 0.7 points in the EU-28 and 0.8 points in the euro area. The profit shares reported for the United States at the beginning and end of this period were also similar, 0.4 points higher in 2016 than a decade earlier.

Amongst the five largest economies of the EU, profit shares for non-financial corporations increased substantially between 2006 and 2016 in Spain (up 6.1 points), while they fell elsewhere, moderately so in France (down 0.7 points) and the United Kingdom (down 1.3 points) and more strongly in Italy (down 3.3 points) and Germany (down 3.9 points). Across all EU Member States, the largest rises in profit shares between 2006 and 2016 were observed in Ireland (up 17.7 points) and Malta (up 7.4 points), while the largest falls were reported for Estonia (down 7.0 points), Bulgaria (down 8.0 points) and Cyprus (down 8.5 points). Among the three EFTA countries for which data are available varied developments were observed, with a large increase in the profit share for non-financial corporations in Iceland (up 15.0 points; 2009-2015), a relatively small fall in Switzerland (down 2.8 points) and a fall larger than in any of the EU Member States in Norway (down 12.6 points).

Distribution of gross operating surplus

The gross operating surplus of non-financial corporations is mainly used to pay taxes on income and wealth and to remunerate capital, for example in the form of interest or dividends paid to shareholders. In addition, non-financial corporations also receive interest and other property income from their financial investments, for example also in the form of dividends or reinvested earnings. After accounting for these payments and income as well as other miscellaneous current transfers, the remainder of the gross operating surplus is available as the saving of non-financial corporations, to be used for example for investment or other capital transactions or to be lent.

Figure 3 shows non-financial corporations’ gross operating surplus, how it is distributed, and the resulting net lending (if positive) or net borrowing (if negative). Total net distributions (taxes, interest, other property income/expenditure, other current transactions and capital transactions) correspond to the full bar below the horizontal axis, except for a few cases in 2016, most notably Romania (2015 data), Poland, Hungary (2015 data), Austria and Finland among the EU Member States, as well as Iceland (2014 data) among the EFTA countries, where one or more components of net distribution were positive. Total net distributions represented similar shares of value added in the EU-28 (-39.0 %) and the euro area (-37.2 %), but were somewhat lower in the United States (-32.9 %) in 2016.
Figure 3: From gross operating surplus to net lending/borrowing, 2016
(% share of gross value added)
Source: Eurostat (nasa_10_nf_tr)

Among the EU Member States, total net distributions by non-financial corporations were highest in 2016 in Romania (-74.9 % of value added; 2015 data), Ireland (-68.2 %) and Cyprus (-67.4 %) [1]. The lowest total net distributions relative to value added among the Member States were reported for the Netherlands (-30.2 %), Slovenia (-30.7 %), Denmark (-31.2 %) and the United Kingdom (-32.3 %) and these were the only ones where this ratio was smaller than one third of value added. Among the non-member countries shown in Figure 3, a particularly high ratio of total net distributions to value added was observed in Turkey (-75.7 %), while a low ratio was recorded for Switzerland (-30.3 %).

Leaving aside capital transactions (see later), looking at the individual types of current distributions, the largest share for non-financial corporations in 2016 was generally for property income other than interest. In the EU-28 this was equivalent to -10.9 % of value added and in the euro area it was -9.5 %, thereby in both cases accounting for more than three fifths of all net current distributions; Table 4 in the annex at the end of this article provides more detailed information. In the United States the ratio of net property income other than interest to value added was -7.6 % which was just over half of all net current distributions. In the EU-28, the vast majority of net property income other than interest in 2016 was distributed income of corporations: this heading accounted for 98 % of the payments and 93 % of the receipts of all property income other than interest. By contrast, reinvested earnings on direct foreign investment, property income attributed to insurance policy holders, and rents each made up at most 1 % of payments and at most 3 % of receipts of property income other than interest. In the United States, distributed income of corporations accounted for a similar share of payments (98 %) of property income other than interest but a larger share (100 %) of receipts. The remaining component of net property income is net interest. Net interest was of a similar size in the EU-28 and the euro area in 2016, equivalent to -1.0 % and -0.9 % of value added of non-financial corporations respectively. Net interest made a larger contribution to total net current distributions in the United States, equivalent to -3.2 % of value added. Among the EU Member States, Slovenia (1.2 % of value added), Germany (0.5 %) and Sweden (0.2 %) recorded positive values for net interest, meaning that their non-financial corporations received more interest income than they paid in interest. Elsewhere in the EU this ratio was generally smaller than -2.5 % of value added, with larger negative ratios of net interest relative to value added in Ireland (-3.6 %) and Estonia (-4.3 %) and most notably in Cyprus (-13.9 %). Relatively large negative ratios were also observed in Norway (-3.4 %) and Iceland (-12.3 %; 2014 data) among the EFTA countries as well as in Turkey (-5.3 %; 2015 data).

The ratio of net property income other than interest to value added was particularly large in Romania (-40.2 %) and Lithuania (-25.1 %) among the EU Member States — this was also the case in Turkey (-34.6 %) — while in all other Member States and non-member countries in Figure 3 it was smaller than -20.0 %. Iceland was an exception as it reported a positive value for this indicator, with net property income other than interest equivalent to 2.2 % of value added in 2014, and thereby contributing positively to net lending.

Taxes on income and wealth were equivalent to -3.9 % of non-financial corporations’ value added in the EU-28 in 2016 and -4.0 % in the euro area, while they were somewhat lower (-2.9 %) in the United States. In the EU-28 and the euro area such taxes were therefore the second largest component on net current distributions, whereas in the United States they were only the third largest, as they were not only smaller than net property income other than interest but also smaller than net interest. Four EU Member States — Denmark, Greece, Cyprus and Luxembourg — as well as Iceland and Switzerland reported that taxes on income and wealth accounted for a larger share of net current distributions than property income other than interest. In fact, Cyprus and Greece recorded the largest ratios of taxes on income and wealth to value added among all of the EU Member States, reaching -13.2 % in Cyprus and -9.9 % in Greece. As well as being the case in the United States as noted above, the ratio of taxes on income and wealth to value added was smaller than -3.0 % of value added in five EU Member States: Hungary (2015 data), Slovenia and the three Baltic Member States.

Investment rates

Investment is the largest part of capital transactions. The investment rate for non-financial corporations presented in Figures 4 to 6 shows investments in fixed assets (mainly machinery and buildings) as a percentage of value added in the production process. In 2016, the investment rate was higher in the EU-28 (22.7 %) and euro area (22.8 %) than in the United States (18.0 %).
Figure 4: Gross investment rate of non-financial corporations, 2016
(% ratio of gross fixed capital formation to gross value added)
Source: Eurostat (nasa_10_nf_tr)

Among the five largest EU economies, investment rates for non-financial corporations in 2016 were above the EU-28 average in Spain (27.1 %) and France (23.3 %), while they were below average in Italy (20.2 %), Germany (20.0 %) and the United Kingdom (16.7 %), the latter being the lowest gross investment rate among the EU Member States. The disparity of investment rates between different economies can be partly explained by structural differences, for example the relative importance of capital-intensive activities. Five Member States reported higher investment rates than that observed for Spain, with the rates in Sweden (27.3 %), Romania (27.9 %; 2015 data), Slovakia (also 27.9 %) and the Czech Republic (29.2 %) exceeded by a large margin by the very high rate in Ireland (38.5 %).

Investment rates between 2006 and 2016

Although annual investments may be very volatile for individual enterprises, cyclical trends can be observed nationally. Figure 5 shows the investment rates of the five largest EU economies and the United States together with the EU-28 and euro area averages.
Figure 5: Index of gross investment rates of non-financial corporations, 2006-2016
(2006 = 100)
Source: Eurostat (nasa_10_ki) and (nasa_10_nf_tr)

The impact of the global financial and economic crisis on the investment rates of non-financial corporations is clearly visible, with some of the economies recording a fall already in 2008 and all recording lower rates in 2009 than in 2008. The United States and the EU-28 continued to report falling investment rates in 2010, whereas in Germany (no change), the United Kingdom and the euro area (0.2 points) rates had stabilised while they increased in Spain, France and Italy. In 2011, all of the economies shown in Figure 5 reported increases in the investment rate; thereafter, developments were more varied. In Spain, investment rates increased most strongly between 2011 and 2016, falling only slightly in 2015. The United States and the United Kingdom reported increasing rates between 2011 and 2014 or 2015 after which they dipped lower. France’s investment rate for non-financial corporations followed a similar development to that for the EU-28 and the euro area, with rates relatively stable between 2011 and 2015 followed by a more notable increase in 2016. In Germany and Italy, the investment rate returned to a downward development, falling in 2012 and 2013 before recovering somewhat in 2014 or 2015 and subsequently stabilising.

Among all of the EU Member States (see Figure 6; no data for Malta), Ireland recorded the most substantial increase in its investment rate (up 15.3 points from 23.2 % in 2006 to 38.5 % in 2016), mainly due to investment in intellectual property. The only other Member States to report higher investment rates in 2016 than in 2006 were Cyprus, Belgium, France, Sweden, the Netherlands and Austria. Five Member States reported falls of at least 10.0 points between 2006 and 2016: the three Baltic Member States, Slovenia and Bulgaria. A large fall in the investment rate (-29.8 points; 2006-2014) was also observed in Iceland.
Figure 6: Changes in investment rate of non-financial corporations, 2006-2016
(percentage points)
Source: Eurostat (nasa_10_ki) and (nasa_10_nf_tr)

Investment and fixed capital consumption between 2006 and 2016

While gross fixed capital formation reflects an increase in fixed assets, the consumption of fixed capital reflects the decline in the value of fixed assets. Fixed assets decline in value due to normal wear and tear, foreseeable ageing (obsolescence) and a normal rate of accidental damage. Unforeseen obsolescence, major catastrophes and the depletion of natural resources, however, are not included.

Although the difference between the investment rate and ratio of the consumption of fixed capital to gross value added changed over time, in the EU-28 and the United States the investment rate exceeded the ratio of the consumption of fixed capital to gross value throughout the period observed in Figure 7, albeit it with a narrower gap during the global crisis.

Time series for these two indicators are provided for the euro area, the EU Member States and EFTA countries in Tables 2 and 3 of the annex at the end of this article.
Figure 7: Gross investment and consumption of fixed capital of non-financial corporations, 2006-2016
(% of gross value added)
Source: Eurostat (nasa_10_ki) and (nasa_10_nf_tr)

Financing investment: net lending and borrowing

Non-financial corporations’ savings and net borrowing (or lending) are used to finance gross capital formation, other capital transfers and acquisitions less disposals of non-financial non-produced assets. Gross capital formation includes gross fixed capital formation (referred to elsewhere in this article as investment), changes in inventories, and acquisitions less disposals of valuables. Non-financial non-produced assets concern, for example, land, mineral reserves or radio spectra.

The difference between savings and all capital transactions is called net lending or net borrowing, depending on whether it is positive or negative. If non-financial corporations are net lenders, it means that they have an excess of savings over investment and other capital transactions that they can lend to other sectors of the national economy or to non-residents. Conversely, they are net borrowers when they need to borrow money from other sectors to supplement their savings in order to finance their investment and other capital transactions.

In 2016, non-financial corporations in the EU-28 and the euro area were net lenders, with their net lending valued at 1.1 % of value added in the EU-28 and 3.6 % in the euro area. In the United States the situation was even more balanced, as non-financial corporations’ net borrowing was equivalent to 0.5 % of value added (see Figure 3).

Amongst the largest EU economies, non-financial corporations in Germany (5.9 % of value added), Spain (5.7 %), the United Kingdom (3.1 %) and Italy (2.2 %) were all net lenders in 2016, whereas non-financial corporations in France (-3.9 %) were net borrowers. The highest ratios of net lending to value added among the EU Member States (no data for Croatia or Malta) were recorded in the Netherlands and Greece (both 11.7 %) and Hungary (11.0 %; 2015 data), while a further 15 Member States reported net lending that was less than 10.0 % of value added. Net borrowing was smaller than 10.0 % of value added in six of the eight other Member States, reaching 18.5 % of value added in Romania (2015 data) and 29.2 % of value added in Cyprus. None of the EFTA countries shown in Figure 3 reported a particularly high net borrowing need or net lending possibility, whereas in Turkey net borrowing by non-financial corporations was equivalent to 14.4 % of value added in 2016.

Non-financial corporations in the EU-28 and the euro area moved from being net borrowers during the period from 2006 to 2008, to being net lenders almost every year since 2009, the only exception being 2012 when non-financial corporations in the euro area borrowed a small amount, equivalent to 0.1 % of value added. In 2016, net lending in the euro area was equivalent to 3.6 % of value added, whereas in 2006 net borrowing had been equivalent to 3.5 % of value added (see Figure 8). In the early years of the period studied, non-financial corporations in the United States reported a similar development to that of their counterparts in the EU-28, moving from net borrowing between 2006 and 2008 to net lending from 2009 onwards. However, by 2014 US non-financial corporations were again net borrowers and remained so until 2016.
Figure 8: Net lending/borrowing of non-financial corporations, 2006-2016
(% ratio of net lending/borrowing to gross value added)
Source: Eurostat (nasa_10_nf_tr)

The developments for non-financial corporations’ net lending/borrowing between 2006 and 2016 were diverse among the five largest economies of the EU. In France, non-financial corporations remained net borrowers throughout this period, while the reverse was true in the United Kingdom and to a large extent in Germany, with a relatively small level of net borrowing recorded in the latter in 2008. By contrast, non-financial corporations in Spain and Italy moved from being net borrowers in 2006 to net lenders in 2016. This change was most notable in Spain, moving from net borrowing equivalent to 15.2 % of value added in 2006 to net lending of 5.7 % in 2016.

Time series for net lending/borrowing are provided for all EU Member States and EFTA countries in Table 5 of the annex at the end of this article.

Data sources

The compilation of sector accounts follows the European system of accounts (ESA 2010). It provides the basis for all of the data for the EU Member States, EFTA and enlargement countries, as collected by the European Central Bank (ECB) and Eurostat. Together they publish integrated non-financial and financial accounts, including financial balance sheets, for the euro area; Eurostat also publishes the non-financial accounts of the EU.

The latest annual sector accounts 2016 data for the United Kingdom have not been validated or published on Eurostat's website due to inconsistencies. New data for the United Kingdom are expected in June 2018.

The non-financial accounts

Non-financial accounts provide a systematic description of the different stages of economic process: production, generation and distribution, use and accumulation of income. Each of the accounts ends with a balancing item: value added, operating surplus, primary income, disposable income, saving. In case of non-financial corporations some of these can be seen as profit measures.

The data presented in this article do not take account of profits/losses caused by changes in the price levels of assets or by extraordinary events (such as catastrophic losses). Profit measures may be calculated either gross or net of depreciation (called consumption of fixed capital in national accounts): in this article all indicators are presented gross of the consumption of fixed capital.

The non-financial corporations sector

Institutional sectors within national accounts bring together economic units with broadly similar characteristics and behaviour. The non-financial corporations sector is one of five sectors — along with financial corporations, general government, households and non-profit institutions serving households — that together make up the domestic economy.

The non-financial corporations sector consists of institutional units which are independent legal entities and market producers, and whose principal activity is the production of goods and non-financial services. It may be divided into three subsectors covering: public non-financial corporations; national private non-financial corporations; foreign controlled non-financial corporations.

In general, sole proprietorships and most partnerships that do not have an independent legal status are considered to be part of the household sector, rather than corporations (financial or non-financial). However, there are sometimes practical difficulties in delineating ‘quasi-corporations’ (unincorporated businesses with the characteristics of companies) between corporations on one hand and the household sector on the other, which may influence the scope and comparability of the data presented as well as the internal consistency of the full set of accounts.

Indicator definitions

The profit share of non-financial corporations is defined as the gross operating surplus divided by gross value added. This profitability indicator shows the share of the value added created during the production process that is used to remunerate capital. It is the complement of the remuneration of labour (known in national accounts as compensation of employees) which accounts for most of the remainder of value added, the residual amount relating to taxes less subsidies on production and imports.

The gross investment rate of non-financial corporations is defined as gross fixed capital formation divided by gross value added. This ratio relates the investment in fixed assets (such as buildings, machinery, software, major improvements to fixed assets) to the value added created during the production process.

Context

Non-financial sector accounts form part of the national accounting framework, and are compiled in the EU in accordance with the European system of national and regional accounts (ESA 2010). They are an indispensable tool for analysing developments concerning production, the distribution of income, savings and investment by various institutional sectors, including non-financial corporations.

Issues relating to the non-financial corporations sector include measures of profit and investment as well as the overall level of net lending or borrowing.

Since the beginning of the economic and monetary union (EMU) in 1999, the ECB has been one of the main users of national accounts. A large number of monetary and financial indicators are evaluated in relation to other relevant data that allow the combination of monetary, financial and economic analyses, for example, through key national accounts aggregates and sector accounts. In this way monetary and financial indicators can be analysed within the context of the rest of the economy.

The investment rate for the total economy and by institutional sector is a key indicator for economic analysis and European policy making, in particular in the context of the European Commission’s Investment Plan for Europe and in the context of monitoring Member States’ economies under the European Semester (EU country-specific recommendations)

The investment rate is also part of the Principal European Economic Indicators (PEEIs).

Financial institutions’ interest in national accounts may range from a broad analysis of the economy to specific information concerning savings, investment or debt among households, non-financial corporations or other institutional sectors.

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Key indicators (nasa_10_ki)
Non-financial transactions (nasa_10_nf_tr)

Notes

  1. Note that in Romania income from other current transactions was greater than the expenditure for this heading, thereby contributing positively (2.1 % of value added) to net lending/borrowing. Several other EU Member States also reported a positive value for other current transactions, ranging from 1.8 % of value added in Poland to 0.3 % or less in Hungary (2015 data), Austria and Finland; Iceland also reported a very small positive balance (0.1 %; 2014 data) for other current transactions.