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1
Benchmark Definition of FDI, 4 edition (BMD4)
OECD revises international standards
for FDI statistics
by Ayse BertrandManager, International Investment Statistic
Investment Division, Directorate for Financial and Enterprise Affairs, OECD
2
OECD Benchmark Definition
Prepared under the auspices of the OECD Investment Committee
Technical work conducted by the OECD experts of the 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, IMF, and other international institutions
3
Objectives of Benchmark Definition
To provide– a single point of reference for FDI statistics;– clear guidance for individual countries – 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
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What do we want to measure?
Dichotomy of FDI: Part of Balance of Payments statistics/ financial account FDI statistics –(also a leading globalisation indicator)
New challenges developing meaningful presentations of FDI 1) excluding transactions through Special Purpose Entities
(SPEs)2) FDI by type (M&As, greenfields, extension of capital,
financial restructuring)3) FDI according to ultimate investing/ultimate host country4) Research agenda
5
Challenges for BMD4
BOPFinancial Acc.
FDI (aggr)
IIPFDI (aggr)
BMD4FDI statistics
HEGIAMNE’s
BOPCurrent Acc.
Invest. Income Development
of new
Methodologies
USERS’ PRIORITY
- Pass through investment-M&As
- UIC/IHC
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BMD4
Guiding principles for the revision
1. Need to consider evolving user requirements
2. Need for clarity
3. Need for continued international co-ordination to achieve harmonised standards (BPM, SNA, HEGI, MSTS, etc)
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BMD4
Results of the revision
1. Existing recommendations remain unchanged and/or are reinforced, improved, clarified
2. Replacement/removal of existing recommendations.
3. Introduction of new recommendations.
4. Research agenda
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BMD4
Selected topics
1. FDIR
2. Valuation
3. Scope of FDI statistics1. Standard features
Asset/liability principle
Directional principle and excluding SPEs
2 Supplemental featuresM&As
UIC/UHC
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FDIR
Classification as FDI two institutional units resident in different economies and in a FDI relationship.
FDIR (successor of FCS) is the method to identify and to determine the extent and type of DI relationships.
FDIR is based on equity investment only. FDIR allows compilers to determine the population of
direct investors and direct investment enterprises to be included in FDI statistics. (see also OECD HEGI)
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FDIR
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 (direct investment enterprise).
The lasting interest = LT relationship between the direct investor and the direct
investment enterprise and a significant degree of influence on the management of the
enterprise.
The ownership of 10 % or more of the voting power of a resident enterprise by a non-resident investor in a resident enterprise is the evidence of such a relationship.
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FDIR
A foreign direct investor is an entity (an institutional unit) 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 the economy and could be any of the following:i. an individual;ii. a group of related individuals;iii. an incorporated or unincorporated enterprise;iv. a public or private enterprise;v. a group of related enterprises;vi. a government; vii. an estate, trust or other societal organisation; orviii. any combination thereof.ix. In the case where two enterprises each own 10% or more of each
other’s voting power, each is a direct investor in the other.
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FDIR
Basic types of affiliates:– A controlled affiliate is an enterprise in which the
investor has control of more than 50% of the voting power.
– A non-controlled affiliate is an enterprise in which the investor has control of at least 10% of the voting power and no more than 50%.
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FDIR: Principles for extending the relationship through indirect
ownership A series of controlled
affiliates can continue as long as control exists at each stage in the ownership chain
A
B
C
8 0 %
8 0 %
E c o n o m y 1
E c o n o m y 2
E c o n o m y 3
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FDIR: Principles for extending the relationship through indirect
ownership:
Any controlled affiliate can extend the relationship to a non-controlled affiliate by owning from 10% to 50% of the voting power of that enterprise
A
B
CEc o n o m y 3
6 0 %
3 0 %
Ec o n o m y 1
Ec o n o m y 2
3 0 %
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FDIR: Principles for extending the relationship through indirect
ownership:
A non-controlled affiliate can extend the relationship only to another non-controlled affiliate by owning more than 50% of the voting power of that enterprise.
Such a chain of non-controlled affiliates can be extended as long as majority ownership of voting power exists at each stage.
A
C
E c o n o m y 2
E c o n o m y 1
B
E c o n o m y 3
3 0 %
6 0 %
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FDIR: Basis for extending the relationship through joint ownership
investor and its controlled affiliates combined own +50% of the voting power of an enterprise, the owned enterprise is a controlled affiliate of the investor.
investor and its controlled affiliates combined own 10% - 50% of the voting power of an enterprise , the owned enterprise is a non-controlled affiliate of the investor.
A
B
C F
E
E c o n o m y 1
E c o n o m y 2
E c o n o m y 3
3 0 %8 0 %
3 0 %
8 0 %
8 %
8 %
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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)
i. Recent transaction price
ii. Market capitalisation method
iii. Net asset value (NAV) – Including goodwill and intangibles
– Excluding goodwill and intangibles
iv. Present value
v. Own funds at book value (OFBV)
vi. Apportioning global value
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Scope of FDI Statistics
1) Two sets of data:
a) Aggregate FDI statistics [BOP Financial account & OECD BMD]
b) Detailed FDI statistics = OECD BMD By partner country By industry
2) Standard features
i. Asset/liability principle
ii. Directional prin. & excluding funds passing through SPEs
3) Supplemental features
i. M&As
ii. UIC/UHC
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Aggregate FDI statistics [BPM6 & BMD4 ]
Exhibit 1. FDI Transactions According to Asset/Liability Principle{Transactions in} Assets {Transactions in} Liabilities
Of direct investors in direct investment enterprises Of direct investment enterprises to direct investors
A1 Equity L1 Equity
A1.1 Equity transactions L1.1 Equity transactions
A1.2 Reinvestment of earnings L1.2 Reinvestment of earnings
A2 Debt instruments L2 Debt instruments
Of direct investment enterprises in direct investors- Reverse investment:
Of direct investors to direct investment enterprises – Reverse investment
A3 Equity L3 Equity
A4 Debt instruments L4 Debt instruments
Of direct investment enterprises in other affiliated enterprises abroad
Of direct investment enterprises to other affiliated enterprises abroad
A5 Equity L5 Equity
A6 Debt instruments L6 Debt instruments
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Detailed FDI Statistics - DP [BMD4]
Outward Foreign Direct Investment Inward Foreign Direct Investment
Outward equity transactions Inward equity transactions
A1 Equity assets of DI in DIE L1 Equity liabilities of DIE to DI
A1.1 Equity transactions L1.2 Equity transactions
A1.2 Reinvestment of earnings L1.2 Reinvestment of earnings
-L3 Equity liabilities of DI to DIE* -A3 Equity assets of DIE in DI*
A5 Equity assets of DIE in other affiliated enterprises abroad
L5 Equity liabilities of DIE to other affiliated enterprises abroad
Outward debt instruments transactions Inward debt instruments transactions
A2 Debt instruments assets of DI in DIE L2 Debt instruments liabilities of DIE to DI
-L4 Debt instruments liabilities of DI to DIE* -A4 Debt instruments assets of DIE in DI*
A6 Debt instruments assets of DIE in other affiliated enterprises abroad
L6 Debt instruments liabilities of DIE to other affiliated enterprises abroad
Exhibit 1. FDI Transactions According to the Directional Principle
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Comparison of two techniques
Directional principle:
The asset position is greater than the outward position and the difference is equal to:
(A1+A2+A3+A4+A5+A6) – (A1-L3+A5+A2-L4+A6) = A3+L3+A4+L4
The liability position is greater than the inward position and the difference is equal to:
(L1+L2+L3+L4+L5+L6) – (L1–A3+L5+L2–A4+L6) = A3+L3+A4+L4
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Genuine FDI
FDI according to immediate counterpartyProblems:
- Inflation of FDI- Analytical interpretation of
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 : under development in co-ordination with SNA
– Operating affiliates [Research agenda]
23
Supplemental series
FDI by type1. M&As
• Non-resident purchase of existing equity (10% to 100% of the voting power)– Sub-category (above 50% of the voting power)
2. Other types of FDI – Research agenda
i. Issuance of new equity– Greenfield investment– Extension of capital
ii. Financial Restructuring
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Exhibit 3. Components of M&A transactions
conceptual framework by country allocation and by industry classification Foreign Direct Investment
Inflows: Gross investments and divestments by non-residents
Investment in equity Divestment in equity
Of which:Acquisition of existing stake in resident companies by non-residents
Of which:Sale of existing stake in resident companies by non-residents
(i) partner country and(ii) industry
(i) partner country and(ii) industry
Outflows: Gross investments and divestments by residents
Investment in equity Divestment in equity
Of which:Acquisition of existing stake in non-resident companies by residents
Of which:Sale of existing stake in non-resident companies by residents
(i) partner country and(ii) industry
(i) partner country and(ii) industry
Memo items: Total of which M&A under control (i) partner country and(ii) industry
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NO YES NO YES
NO YES NO YES
Other type of FDI
[Same scheme applies to both inflows and outflows]Chart 1: FLOW CHART TO CLASSIFY FOREIGN DIRECT INVESTMENT BY TYPE
INVESTMENT (I) DESINVESTMENT (D)
Other type of FDI
(Purchases) (Sales)
Q-1-(I). Is the purpose of the transation to "purchase existing shares" for the acquisition of an equity stake in a DIE in the immediate counterpart country?
Other type of FDI Q-OUT-2-(I). Is the purpose of the investment to "purchase existing shares" in for the acquisiton of an equity stake in a DIE in "final" country (destination)?
M& A type transactionQ-3-(I) What is the country and the industry of the DIE in which a DI stake was acquired?Q-4-(I) Is the total percentage of ownership after the transaction more than 50%? If yes, is it a first time equity investment in the DIE?
M& A type transactionQ-5-(I) What is the country and the industry of the DIE in which a DI stake was acquired?Q-6-(I) Is the total percentage of ownership after the transaction more than 50%? If yes, is it a first time equity investment in the DIE?
Q-1-(D) Is the purpose of the transation to "dispose existing shares" through the sales of an equity stake in DIE from the immediate counterpart dountry?
M& A type transactionQ-3-(D) What is the country and the industry of the DIE in which a DI stake was sold?Q-4-(D) Is the total percentage of ownership after the transaction more than 50%?
Other type of FDI
Q-2-(D) Is the purpose of the transation to "dispose existing shares" through the sales of an equity stake in DIE from the "final" country (destination)?
M& A type transactionQ-5-(D) What is the country and the industry of the DIE in which a DI stake was sold?Q-6-(D) Is the total percentage of ownership after the transaction more than 50%?
26
Examples of transactions
FDI – Equity capital
of which:
M&A type transactions
- A direct investor (in economy A) purchases existing shares issued by a target company (in economy B) from its shareholders;- A direct investor (in economy A) establishes a subsidiary holding company (in economy B) to purchase existing shares issued by a target company (in economy B or C) from its shareholders.
Other types of FDI
Greenfield investment
- An investor (country A) established a subsidiary company (country B).- An investor (country A) established a subsidiary holding company (country B) to establish a sub-subsidiary company (country B or C).
Extension of capital (for expanding business operations)
- An investor (country A) purchases shares newly issued by an existing subsidiary company (country B) for expanding its business operations.- An investor (country A) purchases shares newly issued by an existing subsidiary holding company (country B) to purchase shares newly issued by a sub-subsidiary company (country B or C) for expanding its business operations.
Investment for financial restructuring
- An investor (country A) purchases existing shares issued by an existing subsidiary company (country B) for debt repayment or loss reduction.- An investor (country A) purchases shares newly issued by an existing subsidiary holding company (country B) to subscribe existing shares issued by an existing sub-subsidiary company (country B or C) for debt repayment or loss reduction.
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Ultimate investing/host country
Simple example of Ultimate Investing Country Country C1 Enterprise E1 | 100% | Country C2 Enterprise E2 | 100% | Country C3 Enterprise E3
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Ultimate investing/host country
More Complex Example of Ultimate Investing Country Country C1 Country C3 Country C5 Enterprise E1 Enterprise E3 Enterprise E5 | | | 60% 20% 80% | | | Country C2 Country C4 Country C6 Enterprise E2 Enterprise E4 Enterprise E6 | | | 70% 20% 10% | | | ______________________________________________ | Country C7 | | Enterprise E7 |
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THANK YOU FOR YOUR ATTENTION