OECD Benchmark Definition of Foreign Direct Investment (Fifth Edition)

7. Standard and supplementary FDI series

Abstract

This chapter describes the presentations of foreign direct investment (FDI) statistics recommended in this Benchmark Definition. FDI statistics are provided in standard and supplementary (that is, voluntary) presentations. These presentations include aggregate FDI statistics according to the asset/liability principle as well as more disaggregated FDI statistics according to the directional principle. These disaggregated statistics include breakdowns by partner economy, by industry, and by type of FDI (e.g., greenfield investment, extensions of capacity, mergers and acquisitions, and financial and corporate restructuring).

7.1. Introduction

481. This chapter describes the presentations of foreign direct investment (FDI) statistics recommended in this Benchmark Definition. These statistics are broken down between standard and supplementary series.

• Standard series are series that have well-developed methodologies and interpretations. They are the foundation of the FDI framework and greatly enhance the analytical usefulness of FDI statistics.

• Supplementary series are those that have, in some cases, less well-developed methodologies, and in other cases, series that compilers may not yet be able to collect due to the data available to them. Nevertheless, supplementary series are typically valuable to users and this is why their compilation and dissemination are encouraged. By encouraging FDI statisticians to compile these series, the methodologies and interpretations will hopefully be refined.

482. Standard and supplementary presentations can, in turn, be further disaggregated by partner economy and by industry. Finally, these series are presented according to either the asset/liability or the directional principles. The standard and supplementary series are compiled using the same fundamental FDI concepts and definitions but serve different analytical uses.

483. This chapter describes the presentations recommended by this Benchmark Definition. Annex B presents the reporting template for each series. Chapter 8 provides the methodologies for presenting direct investment statistics disaggregated by immediate and ultimate partner economy and by industry of main economic activity under the directional principle. Chapter 9 describes the methodology for breaking down FDI financial transactions by type (i.e., new (greenfield) investment, extensions of capacity, mergers and acquisitions, and financial and corporate restructuring).

7.2. Standard FDI series

484. The standard FDI series consist of aggregate FDI statistics as they appear in the balance of payments and the international investment position. It also includes FDI series disaggregated by partner economy and by industry.

7.2.1. Aggregate FDI statistics

485. The standard aggregate FDI series recommended in this Benchmark Definition are:

• Aggregate FDI financial transaction, position, and income statistics compiled using the asset/liability principle with resident special purpose entities (SPEs) separately identified. These series will show detail by instrument (e.g., by equity, reinvested earnings – only for financial and income transactions – and debt instruments) as well as the breakdown necessary to convert from the asset/liability to the directional principle presentation.

• The integrated FDI position statement, showing through the accumulation accounts, the relationship between the opening and ending positions resulting from financial transactions, revaluations (broken down into exchange rate changes and other price changes), and other changes in volume. Resident SPEs should be separately identified for aggregate FDI positions. Additional detail on other changes in volume (i.e., debt cancellation and write-offs as well as reclassifications) can be reported on a supplementary basis.

486. These aggregate FDI statistics are consistent with the series appearing as direct investment in the balance of payments, the international investment position (IIP), and the integrated IIP (see Chapter 10).1 These series provide data for an economy on the aggregate FDI assets and liabilities by type of instrument. Therefore, these series facilitate macroeconomic analyses.

7.2.2. Disaggregated FDI statistics

487. The standard disaggregated FDI series recommended in this Benchmark Definition are:

• FDI financial transaction, income and position statistics disaggregated by immediate partner economy according to the directional principle with resident SPEs separately identified. These series include the breakdown by instrument.

• FDI financial transaction, income and positions statistics disaggregated by industry according to the directional principle with resident SPEs separately identified. These series include the breakdown by instrument.

• Inward FDI positions disaggregated by ultimate investing economy (UIE) according to the directional principle. This series includes the breakdown by instrument.

488. Statistics presented according to the directional principle enable the analysis of FDI according to the direction of influence (i.e., inward and outward FDI). These series are useful for studying the nature and motivations for FDI. The series on an immediate partner economy basis demonstrate the FDI links between economies but the ultimate origin of the investment can be obscured if the investment passes along an ownership chain. The series of inward FDI positions by UIE help to address this issue by identifying the economy of the entity that ultimately owns the inward investment position in the reporting economy. It also helps to identify investment linkages and financial interdependencies between economies not revealed by the statistics on an immediate partner economy basis.

7.3. Supplementary FDI series

489. This Benchmark Definition strongly encourages the compilation of the following supplementary series:

• Outward FDI positions disaggregated by ultimate host economy (UHE). This series would include the breakdown by instrument. The compiling economy can indicate whether this series includes or excludes resident SPEs.

• Inward FDI income disaggregated by UIE with separate identification of resident SPEs. This series includes the breakdown by instrument.

• Pass-through funds by identifying outward FDI financial transactions, positions and income broken down by the residency of the ultimate controlling parent.

• Aggregate FDI financial transactions by type. This series excludes resident SPEs.2 It is recommended that equity capital be broken down into greenfield (new) investment and extensions of capacity, mergers and acquisitions (M&A), financial and corporate restructuring, and unallocated. Reinvestment of earnings and debt for greenfield investment and extensions of capacity can be separately identified where meaningful for the reporting economy. The level of details provided for the breakdown of FDI financial transactions by type depends on the information available to compilers and user requirements. In addition, it is recommended to separate results for greenfield FDI from extensions of capacity if this information is available.

490. The presentation of outward FDI positions by UHE is a natural counterpart to the presentation of inward FDI positions by UIE. It helps to address the issues with interpretation and use of FDI statistics caused by complicated ownership chains. For example, the geographic allocation of outward investment can be distorted when domestic multinational enterprises (MNEs) channel investment through non-resident SPEs. The outward position statistics by UHE would show the outward position according to the geography of where the investment actually occurs, shedding light on the geographic pattern of domestic multinational enterprises’ offshoring for example. This presentation also helps to better understand the financial linkages between economies by providing important information on how the risks of domestic investors are spread across countries and regions.

491. Inward FDI income by UIE is a natural complement to the inward FDI position statistics by UIE. FDI income also flows along the ownership chain just like capital, obscuring the ultimate source and destination of the income. These statistics are important to understand the impact of globalisation on an economy by identifying where the income generated by direct investment enterprises (DIEs) in an economy ultimately accrues. In the context of extended supply/use tables and trade in value added, inward FDI income by UIE statistics also address the important issue of identifying the blurring lines between trade in services and property income, which can distort the measurement of value added (see Section 10.5.3).

492. The third series (pass-through funds) also addresses issues of interpretation and use of FDI statistics caused by complicated ownership chains by enabling the calculation of an upper bound estimate of the funds passing through an economy. While the separate identification of resident SPEs is valuable, it can be considered a lower bound on the estimate of funds passing through an economy because it is based on a subset of DIEs. Identifying the amount of funds passing through entities in the middle of the ownership chain can give an upper bound of pass-through funds by identifying all FDI passing into and out of ultimately foreign-owned direct investors resident in the reporting economy.

493. The final supplementary presentation is a breakdown of FDI financial transactions by type. It provides information on the potential benefits of FDI to the host economy. For example, new investment (i.e., greenfield investment) and extensions of capacity both act to increase the productive capacity of the host economy and may confer different benefits compared to M&A or financial and corporate restructurings. In the context of public debate, a sharp distinction is often drawn between greenfield investment, providing fresh capital and additional jobs, and M&A that are perceived to include only a change of ownership of an existing corporate entity. This theoretical distinction between the types of FDI however may not occur in practice as the acquisition of existing enterprises can provide important additional economic benefits, such as access to capital, global supply and distribution networks, and different knowledge and technology. The separate treatment of M&A and greenfield investment is part of a political reality to which investment analysts have to respond and, in light of the debate about such things as “strategic sectors”, “national champions”, the need is likely to grow. The information can also be important in the context of national security.

References

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

Notes

← 1.  While the aggregate statistics are consistent, it should be noted that the primary presentation recommended in the Integrated Balance of Payments and International Investment Position Manual, Seventh Edition (BPM7, (IMF, Forthcoming[1])) features the institutional sectoral breakdown of direct investment, while the primary presentation recommended by the OECD features the breakdown necessary to convert the asset/liability principle to the directional principle.

← 2.  The reporting can include resident SPEs if it is not possible to exclude them.