Benchmark Definition of FDI, 4 edition (BMD4)OECD revises international standards for FDI statistics

MENA-OECD TASK FORCE ON FOREIGN DIRECT INVESTMENT STATISTICS FOR POLICY MAKING

Training Seminar

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Training Seminar

Bahrain Investment Center12 December 2007

by Ayse BertrandManager, International Investment Statistic

Investment Division, Directorate for Financial and Enterprise Affairs, OECD

ayse.bertrand@oecd.org

Introduction

� OECD Benchmark Definition of Foreign Direct Investment (BMD4) - Introduction

� Main concepts/definitions– Statistical units

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– Statistical units– Institutional units– FDI, DIE, DI

� FDI components– Equity, RE, debt

� FDI Breakdowns� New FDI series

OECD Benchmark Definition

� Who is responsible in the OECD?� Prepared under the auspices of the OECD Investment

Committee� Technical work conducted by the OECD experts of the

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Workshop of International Investment Statistics (of the Investment Committee)

� First issued in 1983 and revised twice� Fourth edition – forthcoming in 2008

� Prepared in close co-operation with OECD Member countries (30), observers, IMF, and other international agencies

OECD Benchmark Definition

� Objectives are to provide– a single point of reference for FDI statistics;– clear guidance for individual countries – international standards considering the effects of

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– international standards considering the effects of globalisation;

– the basis for a comparable international economic analysis – an objective basis to identify methodological differences

across countries– practical guidance to users of FDI statistics– FDI as measures of globalisation

OECD Benchmark Definition, 4th editions

� Guiding principles for the revision

1. Need to consider evolving user requirements

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2. Need for clarity

3. Need for continued international co-ordination to achieve harmonised standards (BPM, SNA, HEGI, MSTS, etc)

Benchmark Definition, 4th edition

� Main features– Consistency with IMF BPM6– Clarification of concepts to avoid mis-interpretations– Preserving reasonable degree of historical continuity

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– Preserving reasonable degree of historical continuity– New concepts, breakdowns responding to user needs– New sections: uses, globalisation– Glossary– Transparent revision process– Research agenda

OECD Benchmark Definition, 4th edition

� What do we want to measure?� Traditional FDI series - do they meet user needs?� New challenges developing meaningful presentations of FDI

1) Are we treating pass-through funds and capital in transit properly?

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capital in transit properly?2) Is it useful to improve the directional principle?3) How can we obtain FDI by type?

– (M&As, greenfields, extension of capital, financial restructuring)

3) FDI according to ultimate investing/ultimate host country

4) Research agenda

Challenges for BMD4

BOP

BMD4FDI statistics

HEGIAMNE’s

BOPCurrent Acc.

Invest. IncomeDevelopment

of new

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BOPFinancial Acc.

FDI (aggr)

IIPFDI (aggr)

FDI statistics AMNE’sMethodologies

USERS’ PRIORITY

-Pass through investment-Extended DP

-M&As - UIC/IHC

BMD4

� Results of the revision1. Existing recommendations remain unchanged and/or are

reinforced, improved, clarified

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2. Existing recommendations are modified

3. Replacement/removal of existing recommendations.

4. Introduction of new recommendations.

5. Research agenda

Statistical units

� Economic territory & Concept of residence

– Same concepts as SNA and BPM

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– Residence: fundamental for FDI• Between a resident and non-resident• Based on economic territory• Resident of one and only one economic territory

Statistical units

� Economic territory– What is an economy?

• Is it a country? Is it a legal definition?– Physical presence

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– Physical presence• Physical location• Jurisdiction• Government

– Centre of predominant economic interest

• Resident of a single econ. territory• Economic or currency unions

What is considered as economic territory?

� Included– Land area, airspace, territorial waters (incl. jurisdiction over

fishing rights and rights to fuel or minerals), islands – Enclaves in ROW: embassies, consulates, military basis,

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scientific stations, information or immigration offices, aid agencies, central bank representative offices, etc.

– Special zones (eg off-shore centres)

� Excluded– Territorial enclaves used by foreign gvt.

� Decision needed– Disputed zones

Predominant centre of economic interest

� Economic interest– production, consumption, acquisition of assets and

incurrence of liabilities, asset-holding, place of incorporation or registration, and the origin of applicable taxation and regulation.

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regulation.

� Existence of location, dwelling, place of production, or other premises

� Within the territory even if location is not fixed� Location for 1 year or more� Some entities have little or no physical presence -

SPEs

Statistical Units

Institutional units� An institutional unit is an economic entity that is

capable, in its own right, of owning assets, incurring liabilities and engaging in economic

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incurring liabilities and engaging in economic activities and in transactions with other entities. (SNA93 � 4.2)

� households (formed by persons or group of persons);

� legal and social entities corporations (including quasi-corporations), non-profit institutions, and government units

Enterprises

� An enterprise is as an institutional unit engaged in production

� An enterprise may be a – Corporation

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• ancillary corporation is a wholly-owned subsidiary providing services to the parent corporation: transportation, purchasing, sales and marketing, various kinds of financial or business services, computing and communications, security, maintenance, and cleaning.

– Unincorporated enterprise– Non-profit institution,

Unincorporated business

� An unincorporated enterprise is a producer unit which is not a legal entity separate from the owner– Its assets belong to the owner

� Quasi-corporation unincorporated business that

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� Quasi-corporation unincorporated business that operates as an entity separate from its owners. – branches– land ownership– partnerships (both limited and unlimited liability) trusts, and – resident portions of multi-territory enterprises

Branch

� A branch is statistically identified as a quasi-corporation when it has operations over a significant period in an economic territory

� Features for a branch to be recognised: – If the production process involves physical presence, then

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– If the production process involves physical presence, then the operations should be physically located in that territory.

– If the production does not involve physical presence, operations should be recognised as being in the territory by virtue of registration or legal domicile of those operations in that territory;• having substantial operations in the entity’s own right• subject to the income tax system • existence of a complete set of accounts

Notional unit

� Notional unit (a kind of a quasi-corporation) is identified for statistical purposes for direct non-resident ownership of immobile non-financial assets such as – land and buildings.

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– land and buildings.

• can only be used for production in the territory in which they are located.

• owned by a non-resident - treated as owned by a resident notional institutional unit that is in turn owned by non-resident unit holding the legal title.

Foreign Direct Investment

� Foreign direct investment reflects the objective of establishing a lasting interest by a resident enterprise in one economy (direct investor) in an enterprise resident in an economy other than that of the investor

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resident in an economy other than that of the investor (direct investment enterprise). – lasting interest = long-term relationship = influence

on the management of the enterprise. – Ownership of 10% or more of the voting power– Other criteria not accepted

Foreign Direct Investment

� Direct investment – involves both the initial equity transaction that

meets the 10% threshold and all subsequent financial transactions

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financial transactions– includes inward and outward financial

transactions/positions between directly and indirectly owned incorporated and unincorporated enterprises

– Borderline cases

Foreign Direct Investor

� A foreign direct investor is an entity that has acquired at least 10% of the voting power of a corporation, or equivalent for an unincorporated enterprise, resident in an economy other than its own. A direct investor could be from any sector of

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own. A direct investor could be from any sector of the economy and could be any of the following:– an individual;– a group of related individuals;– an incorporated or unincorporated enterprise;– a public or private enterprise;– a group of related enterprises;– a government; – an estate, trust or other societal organisation; or– any combination thereof

Foreign Direct Investment Enterprise

� A direct investment enterprise is an enterprise in which a non-resident investor owns 10% or more of the voting power of an incorporated enterprise or the equivalent of an unincorporated enterprise

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equivalent of an unincorporated enterprise

� Fellow enterprises : common parent but little or no equity ownership in each other

Foreign Direct Investment Relationship FDIR

�FDIR (successor of FCS) - method to identify and to determine the extent and type of DI relationships.

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�FDIR is based on equity investment only.

�FDIR - to determine the population of direct investors and direct investment enterprises

FDIR

�New entities included in FDIR if they meet 10% criteria.

�Treatment of Collective Investment Institutions in FDI (CII)

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FDI (CII)

�Treatment of Non-Profit Institutions Serving Households (NPISH).

FDIR

� Basic types of affiliates:– A subsidiary is an enterprise in which the investor

has control of more than 50% of the voting power. (controlled affiliate)

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power. (controlled affiliate)

– A associate is an enterprise of which the investor owns of at least 10% of the voting power and no more than 50%.(non-controlled affiliate)

FDIR: Principles for extending the relationship through indirect

ownership� A series of

controlled affiliates can continue as long as control

A

80%

Economy 1

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long as control exists at each stage in the ownership chain

B

C

80%

Economy 2

Economy 3

FDIR: Principles for extending the relationship through indirect

ownership:

� Any controlled affiliate can extend the relationship to a non-controlled

A

60%

Economy 1

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non-controlled affiliate by owning from 10% to 50% of the voting power of that enterprise

B

CEconomy 3

30%Economy 2

30%

FDIR: Fellow enterprises

� An direct investor may control or influence two enterprises which

AEconomy 1

80%

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enterprises which have no or little equity ownership in each other

B

C

Economy 2

Economy 3

20%

FDIR: Basis for extending the relationship through joint ownership

� investor and its controlled affiliates combined own

AEconomy 1

30%80%

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combined own +50% of the voting power of an enterprise, the owned enterprise is a controlled affiliate of the investor.

B

C F

EEconomy 2

Economy 3

30%

80%

8%

8%

Valuation of equity

� Market value = basic principle� Listed equity: Listing in an organised market provides a good

basis for valuing listed equity � Unlisted equity (6 methods to estimate market value)

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i. Recent transaction priceii. Market capitalisation methodiii. Net asset value (NAV) iv. Present valuev. Own funds at book value (OFBV)vi. Apportioning global value

FDI components

� FDI positions (stock of FDI)– Equity & reinvested earnings– Debt (intercompany loans)

� FDI Financial Flows– Equity

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– Equity– Reinvestment earnings– Debt instruments

� FDI Income Flows– Earnings on equity

• Distributed earnings• Reinvested earnings

– Interest (on debt instruments)

FDI Earnings according to COPC

� Gains or losses– from valuation changes, such as inventory write-offs, write-downs, or write-

ups; – on plant and equipment from the closure of business;

� writing-off of

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– intangible assets; – research and development expenditures

� provisions for losses on long-term contracts; � X-rate gains and losses� unrealised gains or losses from the revaluation of fixed assets, investments and

liabilities� realised gains or losses through the disposal of assets or liabilities � .standard amoritization of intangible assets

FDI Components

� Equity– Common & preferred shares (excl. non-

participating shares)– Equity in branches

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– Equity in branches– Capital contributions– Retained earnings

� Debt (intercompany loans)

Scope of FDI Statistics

1) Two sets of data:a) Aggregate FDI statistics [BPM Fin. account & OECD BMD]b) Detailed FDI statistics = OECD BMD

� By partner country� By industry

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� By industry 2) Standard features

i. Asset/liability principle (Aggregate FDI)ii. Directional prin. & excluding funds passing through SPEs(FDI by partner and by industry )

3) Supplemental featuresi. M&Asii. UIC

FDI Assets/Liabilities

� Direct investment assets :– by a resident direct investor in its non-resident DIE– reverse investment by a resident DIE in its non-resident

direct investor(s)

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– investment by a resident DIE in non-resident fellow enterprises

� Direct investment liabilities– investment of non-resident direct investor in resident DIE– reverse investment of non-resident DIE in resident direct

investors– investment of non-resident direct investment fellow

enterprises in resident fellow enterprises

Genuine FDI

� FDI according to immediate counterpartyProblems:

- Overstatement (Inflation) of FDI- Analytical interpretation of

origin/destination country

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origin/destination countryorigin/destination industryorigin/destination of country/industry

� FDI excluding funds passing through– SPEs – according to national definition and as a part of DP

– (a typology of SPEs )– Operating affiliates [Research agenda]

Partner country allocation

� According to directional principle– Reverse investment– Loans between fellows enterprises

� Debtor/creditor principle

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� Debtor/creditor principle� Residence/Economic Territory/Predominant Center of

Economic Interest� Immediate host/investing country [IHC/IIC]� Ultimate host/investing country [UHC/UIC]

Industry classification

� Two classifications– According to the activity of the direct investment enterpries

[main recommendation]

– According to the activity of the direct investor

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– According to the activity of the direct investor

� ISIC4� Confidentiality� Parner country/industry

� Top top

Supplemental series

� FDI by type1. M&As

• Non-resident purchase /sale of existing equity (10% to 100% of the voting power)

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– Sub-category (above 50% of the voting power)

2. Other types of FDI – Research agendai. Issuance of new equity

– Greenfield investment– Extension of capital

ii. Financial Restructuring

� Ultimate investing/host country Example of IIC and UCIC

100%

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100%

100%

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THANK YOU

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