1 Lectures 29-31: Foreign Direct Investment Determinants of FDI Evaluation of FDI Effects of FDI.
Benchmark Definition of FDI, 4 edition (BMD4) OECD revises ...
Transcript of Benchmark Definition of FDI, 4 edition (BMD4) OECD revises ...
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
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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