by ayse bertrand manager, international investment statistic investment division,

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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

[email protected]

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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

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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

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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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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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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


Of direct investment enterprises in other affiliated enterprises abroad

Of direct investment enterprises to other affiliated enterprises abroad

A5 Equity L5 Equity


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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]

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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


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



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%?

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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

by ayse bertrand manager, international investment statistic investment division,

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