OECD Benchmark Definition of Foreign Direct Investment (Fifth Edition)

Annex D. Research agenda

858. At the time of publishing this edition of the Benchmark Definition, there are a number of issues requiring further investigation. These issues have been placed on a research agenda with investigations to be undertaken to progress their resolution (to the extent possible). In addition, there are new and emerging issues that will require further investigation. The results of this research will inform future recommendations for the compilation of foreign direct investment (FDI) statistics. The appearance of an issue on the research agenda does not guarantee that recommendations in the Benchmark Definition will change as a result of further investigation. Consequently, compilers should not presume the results of any investigations on the research agenda but should await the outcomes. The topics to be investigated are first categorised under the following five headings:

1. valuation of unlisted equity

2. ultimate host economy

3. pass-through funds in FDI

4. application of the current operating performance concept (COPC)

5. other items.

Valuation of unlisted equity

859. The valuation of unlisted equity remains a challenging issue for FDI statisticians. The use of the market capitalisation method is hindered by the lack of widely available information on the market capitalisation ratios needed. Therefore, it is proposed that the creation of databases of such ratios be explored so that compilers have access to the information needed. Another aspect of the market capitalisation method that needs more exploration is the liquidity discount rate. According to theory and to research, listed shares are inherently more valuable than unlisted shares because they are liquid. Also, as of publication, the market capitalisation method does not include a liquidity discount rate and, thus, additional research to determine the liquidity discount rate as well as on the practical application of market capitalisation ratios should be undertaken.

860. The own funds at book value (OFBV) method may underestimate the value of intangible assets as some of these assets, such as brands and customer lists, may either not be recognised in financial accounting standards or may be valued at historic cost. In addition, real estate may be undervalued if conservative appraisal methods are recommended for use by the financial accounting standards. The development of an enhanced OFBV method that would improve the valuation of intangible assets and real estate would better align the valuation of unlisted equity with market values. Finally, the treatment of provisions under the OFBV method needs more research to align with the conceptual treatment of provisions. The OFBV method values unlisted equity based on its value in the financial statements of the enterprise, which would be affected by the recognition of provisions. However, in macroeconomic statistics, provisions should remain in the value of the enterprise because there is no corresponding financial asset held by a counterparty and because they are not subject to the sort of (legal) contract associated with a liability.

Ultimate host economy

861. While this Benchmark Definition further develops the concept and methods to compile outward position statistics by the ultimate host economy (UHE), it recognises that more research is needed. Therefore, it encourages countries to explore the different concepts of UHE, the different methods for reallocating positions from the immediate to ultimate host economies, and the different populations to be covered (e.g., all direct investors, only resident direct investors that are ultimate controlling parents, or excluding special purpose entities (SPEs)) that produce the most meaningful statistics for their economies.

Pass-through funds in FDI

862.  While the adoption of an internationally agreed definition and typology of SPEs assists compilers in their identification and promotes cross-country comparability, it is important to monitor the evolution of these entities given the changing nature of financing patterns of multinational enterprises (MNEs) and to update the definition and typology of SPEs if needed.

863. In addition to SPEs, MNEs also invest via their operational subsidiaries abroad. This Benchmark Definition proposes a method to identify funds passing through the enterprise from its other business based on the residency of the ultimate controlling parent (UCP). However, more research is needed. This research could focus on a few areas. First, the development of a decision tree to identify “near-SPEs”, which are entities that do not meet the definition of SPEs but that display SPE-like behaviours, such as serving as financial intermediators within the MNE group, would help compilers identify additional entities involved in pass-through activities. A second focus should be on methods to remove the ‘inflation’ in FDI statistics caused by pass-through funds. This includes the interpretation of the breakdown of outward positions by residency of the ultimate controlling parent as suggested in Chapter 8. Moreover, it could be interesting for an economy to know the magnitude of its outward investment that ultimately originates from resident ultimate investors or from non-resident ultimate investors.

864. Another possibility would be the development of the ‘ultimate directional principle’, which would net out all pass-through funding and enable the presentation of FDI statistics on an ultimate counterparty basis. The calculation of FDI according to the ultimate directional principle begins by determining the direction of control/influence (inward or outward) in the direct investment relationship, but this direction is determined based on the residency of the ultimate controlling parent of the immediate direct investor rather than on the residency of the immediate direct investor. It also applies to all direct investment relationships and not just to fellow enterprises.

Application of the current operating performance concept (COPC)

865. While this Benchmark Definition provides more detailed guidance and examples on the adjustments needed to move from earnings in financial statements to earnings measured on the COPC basis, it would be useful to gather additional issues that have posed challenges for the application of the COPC for countries and clarify their treatment. It is also necessary to stay abreast of developments in financial accounting standards to determine if additional adjustments are necessary. These activities should be carried out in consultation with the national accounts and balance of payments to ensure consistency in treatment across macroeconomic statistics.

866. It is also proposed that further research be conducted on the treatment under the COPC of sales of intangible assets that are held for sale. Any clarification note should be drafted in consultation with the national accounts and balance of payments to ensure consistency across the manuals.

867. One of the more challenging compilation issues is the recording of reinvested earnings along the ownership chain. Additional research on practical methods and identification of data sources to support countries in the compilation of reinvested earnings is needed.

Other items

868. Several other items of analytical interest were identified for future investigation:

• For greenfield investment and extensions of capacity, research into the role of leasing is needed. Specifically, should greenfield and extension of capacity statistics include cases where the DIE increases its capacity through leasing fixed assets rather than through their creation?

• A set of FDI statistics based on control relationships, rather than on both control and influence relationships, should be developed. Such statistics would help with analysis of the role of FDI in globalisation given the emphasis put on control in the analysis of globalisation in the Integrated Balance of Payments and International Investment Position Manual, Seventh Edition (BPM7, (IMF, Forthcoming[1])), and the 2025 System of National Accounts (2025 SNA, (United Nations et al., Forthcoming[2])). For example, the recommendation to increase the granularity of the institutional sector accounts and external accounts by identifying foreign-controlled non-financial corporations. Such statistics could also help with the reconciliation of FDI statistics with activities of multinational enterprise (AMNE) statistics and foreign affiliate statistics (FATS). Finally, compilers should be encouraged to conduct more analysis based on the control criterion.

• Countries are encouraged to produce and analyse information on the role of FDI companies in the economy. Research into practical methods to produce such information, whether by linking FDI surveys to other surveys or by collecting additional data on FDI surveys, would support this effort.

References

[1] IMF (Forthcoming), Integrated Balance of Payments and International Investment Position Manual, Seventh Edition (BPM7), International Monetary Fund, Washington D.C.

[2] United Nations et al. (Forthcoming), 2025 System of National Accounts, United Nations et al., New York.