Foreign Direct Investment : Trends, Data Availability, Concepts, and Recording Practices

Neil Patterson, Marie Montanjees, Colleen Cardillo, and John Motala

• Publisher: INTERNATIONAL MONETARY FUND
• eBook ISBN:
  9781589063471
• Year: 2004

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1. Introduction

1.1 Growing international linkages through foreign direct investment (FDI) are an important feature of financial globalization and raise important challenges for policymakers and statisticians in industrial and developing countries alike. With the integration of international capital markets, world FDI flows grew strongly in the 1990s at rates well above those of global economic growth or trade. This has placed the activities of direct investors and direct investment enterprises under increasing scrutiny and presented new challenges for statistical recording, balance of payments projections, economic surveillance, and vulnerability analysis. This report surveys the recent state of FDI statistics at the international and national levels.

1.2 The IMF and other international and regional organizations are working with countries to improve FDI statistics by developing methodologies and providing compilation guidance (including information on country practices), and through technical assistance, training courses, and workshops.

1.3 Countries are compiling and disseminating more data on FDI transactions and stocks and increasingly are adopting the recommendations of international statistical manuals. However, despite these improvements, and reflecting the complexities of compiling these data, there remain important deficiencies in the coverage and comparability of data in both industrial and developing countries. One symptom of these deficiencies is the sizable discrepancies seen in global aggregations of FDI outflows and inflows published by the IMF.¹

1.4 This report provides an overview of (i) the available statistics on FDI (covering recent trends and data availability); (ii) the concepts and definitions set out in international statistical manuals—namely, the fifth edition of the IMF’s Balance of Payments Manual (BPM5;IMF, 1993) and the third edition of the OECD’s Benchmark Definition of Foreign Direct Investment (Benchmark Definition;OECD, 1996); and (iii) country practices in implementing these guidelines. The report is structured as follows. Chapter 2 defines direct investment. Chapter 3 reviews recent trends in the global data on FDI, while Chapter 4 describes the main sources of statistics on direct investment and discusses some of the statistical discrepancies in the published data on FDI. Chapter 5 reviews in greater detail the key concepts and definitions set out in the international statistical manuals for the recording of FDI, while Chapter 6 presents some of the findings from a recent joint IMF-OECD survey on methodological practices regarding the measurement of FDI in 61 countries and how these practices compare with the international recommendations for FDI statistics. The report concludes that an internationally coordinated survey may be required to strengthen FDI statistics across countries.

2. Statistical Definition of Foreign Direct Investment

2.1 The BPM5 defines FDI as a category of international investment that reflects the objective of a resident in one economy (the direct investor) obtaining a lasting interest in an enterprise resident in another economy (the direct investment enterprise). The lasting interest implies the existence of a long-term relationship between the direct investor and the direct investment enterprise, and a significant degree of influence by the investor on the management of the enterprise. A direct investment relationship is established when the direct investor has acquired 10 percent or more of the ordinary shares or voting power of an enterprise abroad.

2.2 Direct investment comprises not only the initial transaction establishing the FDI relationship between the direct investor and the direct investment enterprise but all subsequent capital transactions between them and among affiliated enterprises resident in different economies. The key concepts in the measurement of FDI are elaborated in Chapter 5.

2.3 There are a number of popular misconceptions about FDI.

• FDI does not necessarily imply control of the enterprise, since only a 10 percent ownership is required to establish a direct investment relationship.
• FDI does not constitute a “10 percent ownership” (or more) by a group of “unrelated” investors domiciled in the same foreign country—FDI involves only one investor or a “related group” of investors in one or more countries.
• FDI is not based on the nationality or citizenship of the direct investor—FDI is based on the residence of the direct investor.
• Borrowings by direct investment enterprises from unrelated parties abroad that are guaranteed by direct investors are not FDI.

2.4 Statistics that measure the operations of the foreign affiliates of multinational enterprises—such as sales, employment, and assets—do not form part of the traditional balance of payments and international investment position (IIP) statistics,¹ which capture only the net investment of the direct investor in foreign affiliates. Statistics on the operations of foreign affiliates are referred to as foreign affiliate trade statistics. In recent years, the relevance of statistics on the operations of foreign affiliates has been acknowledged, and efforts are under way to encourage and assist countries in compiling these data. The new interagency Manual on Statistics of International Trade in Services, published in 2002 by the United Nations, provides a framework for developing foreign affiliate trade in services statistics (United Nations and others, 2002). Other organizations—notably the OECD and the United Nations Conference on Trade and Development (UNCTAD)—maintain databases on the activities of foreign affiliates. Box 2.1 highlights some of the types of data produced on the activities of foreign affiliates. The discussion of FDI in this report focuses on the traditional balance of payments and IIP statistics.

Foreign affiliate trade statistics measure the operations of affiliates of foreign firms in an economy and the operations of the affiliates of domestic firms that are domiciled abroad. Typically, the data cover the majority-owned affiliates (ownership of more than 50 percent). The United States has, for many years, compiled data in this area of statistics, and other countries, such as Canada and France, have more recently begun to produce them. Many other industrial countries, as well as Eurostat, OECD, and UNCTAD, are doing work in this area. At present, except in the area of services transactions, there are no internationally agreed guidelines on how foreign affiliate trade statistics should be recorded.

Foreign affiliate trade statistics complement the residency-based foreign direct investment statistics of the balance of payments in that they provide a measure of the impact of direct investment on an economy. Questions that can be addressed include: How much employment do foreign affiliates generate in the host economy? What levels of sales and types of sales are generated by foreign affiliates? How much does intrafirm trade contribute to world trade? What are the sources of financing in addition to cross-border flows from the direct investor or affiliates that are part of the parent group? How much of the value added generated in an economy can be attributed to foreign affiliates?

The data in the table show global FDI balance of payments and IIP data compared with some of the additional level of detail available through foreign affiliate trade statistics (outward investment).

Sources: Balance of payments data—IMF’s Balance of Payments Statistics Yearbook 2002, Part 2, Table B-24; international investment position data—UNCTAD’s World Investment Report, Annex Table B-3; and foreign affiliate trade statistics—UNCTAD’s World Investment Report 2002, Table I.1.

^* The data are extrapolations based on the shares of a very limited number of countries covered in the worldwide outward FDI stocks.

3. Recent Trends in FDI

3.1 With the integration of international capital markets, global FDI flows grew strongly in the 1990s at rates well above those of world economic growth and trade. Recorded global inflows grew by an average of 13 percent a year during 1990–97.¹ Driven by large cross-border mergers and acquisitions (M&A), these inflows increased by an average of nearly 50 percent a year during 1998–2000, reaching a record $1.5 trillion in 2000 (see Table 3.1). Inflows declined to $729 billion in 2001, mostly as a result of the sharp drop in cross-border M&A among the industrial countries, coinciding with the correction in world equity markets.² Worldwide, the value of cross-border M&A declined from the record $1.1 trillion in 2000 to about $600 billion in 2001.³

Table 3.1. Regional Allocation of FDI Inflows

(Billions of U.S. dollars)

¹ The FDI data for industrial and developing countries used in this chapter relate to the balance of payments statistics published in the IMF’s Balance of Payments Statistics Yearbook (BOPSY).

² Reflects Mergers and Acquisitions (M&A) transactions in the telecommunications sector. Source: Hong Kong SAR (2001).

3.2 The industrial countries have long dominated the FDI inflows and outflows and accounted for 94 percent of outflows and over 70 percent of inflows in 2001 (see Figure 3.1). Inflows of FDI to developing countries grew by an average of 23 percent a year during 1990–2000. In 2001, these inflows declined by 13 percent to $215 billion, largely reflecting reduced inflows into Hong Kong Special Administrative Region (SAR), Brazil, and Argentina. Excluding these three economies, FDI inflows into developing countries increased by about 18 percent in 2001. During 1998–2001, FDI inflows to developing countries averaged $225 billion a year. In the same period, portfolio investment and other investment inflows to developing countries were much lower and in aggregate averaged $22 billion a year.⁴

Figure 3.1. Direct Investment Capital Flows

(Billions of U.S. dollars)

Source: IMF, Balance of Payments Statistics Yearbook, various issues.

3.3 During the 1998–2001 period, of the $900 billion of FDI inflows to developing countries, Asia accounted for $407 billion, followed by the Western Hemisphere ($307 billion). Cross-border M&A were an important contributor to these inflows, reflecting the privatization of state-owned assets, especially in Latin America, and the purchase of distressed banking and corporate assets in several Asian economies in the wake of the 1997 financial crisis. Within Asia, the two largest recipients of FDI inflows during this four-year period were China ($165 billion) and Hong Kong SAR ($124 billion). The investment inflows to the Western Hemisphere were domina...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Foreword
• Abbreviations
• 1. Introduction
• 2. Statistical Definition of Foreign Direct Investment
• 3. Recent Trends in FDI
• 4. Data Availability
• 5. Key Concepts in the Measurement of FDI
• 6. Country Practices in the Implementation of International Recommendations for FDI Statistics
• 7. Conclusions
• References
• Boxes
• Footnotes