definition of direct investment course on balance of payments and international investment position...
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Definition of Direct Investment
Course on Balance of Payments and International Investment Position Manual
(BPM6)
IMF-PFTACNadi
November 22-December 1, 2010
BP09
Introduction
Recall Direct investment is
related to control or a significant degree of influence, and tends to be associated with a lasting relationship
Direct investor may supply Funds, knowhow, technology, management, and
marketing
Enterprises in a direct investment relationship are more likely to trade with and finance each other
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Definition of direct investment
Direct investment relationship, (DIE and DI) Control and significance influence Immediate and indirect relationships Transmission of control and influence Subsidiaries, associates, fellow enterprises Control, influence & voting power
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Direct investment relationship
A direct investment relationship an investor resident in one economy makes an
investment that gives control or a significant degree of influence on the management of an enterprise that is resident in another economy
A direct investor is an entity or group of related entities able to exercise control or a significant degree of influence over another entity that is resident of a different
economy04/19/23 4
Direct investment relationship Cont.
A direct investment enterprise is an entity subject to control or a significant degree of influence by a direct investor
In some cases, a single entity may be, at the same time, a direct investor, a direct investment enterprise, and a fellow enterprise in its relationships to other enterprises
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Control and significance influence
Control or influence may be achieved directly by owning equity that gives voting power in the enterprise, or
Indirectly through having voting power in another enterprise that has voting power in the enterprise
Accordingly, two ways of having control or influence are identified
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Immediate and indirect relationships
Immediate direct investment relationships direct investor directly owns equity that entitles it
to 10 per cent or more of the voting power in the direct investment enterprise Control is determined to exist if the direct investor
owns more than 50 per cent of the voting power in the direct investment enterprise
A significant degree of influence is determined to exist if the direct investor owns from 10 to 50 percent of the voting power in the direct investment enterprise
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Immediate and indirect relationships Cont.
Indirect direct investment relationships Indirect direct investment relationships
through owning of voting power in one direct investment enterprise that owns voting power in another enterprise or enterprises
i.e., an entity is able to exercise indirect control or influence through a chain of direct investment relationships
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Transmission of control and influence
Principles for indirect transmission of control and influence through a chain of ownership Control can be passed down a chain of ownership
as long as control exists at each stage Influence can be generated at any point down a
chain of control Influence can only be passed through a chain of
control but not beyond
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Subsidiaries, associates, fellow enterprises
A subsidiary is a direct investment enterprise over which the direct investor is able to exercise control
An associate is a direct investment enterprise over which the direct investor is able to exercise a significant degree of influence, but not control
Fellow enterprises are those which are both under the control or influence of the same direct investor
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Control, influence & voting power
Control or influence - voting power Voting power is not recognized if temporary
obtained through repurchase agreements (because no change in the economic ownership)
through the holding of warrants (holder does not possess voting power until the warrants are exercised)
Voting power may be direct or indirect 04/19/23 12
Relationships - not constituting DI
Representation on the board of directors A common board of directors Participation in policy-making processes Material inter-company transactions Interchange of managerial personnel Provision of technical information Provision of long-term loans at lower than existing
market rates 04/19/23 13
Who might be a direct investor?
an individual or household an enterprise, incorporated or unincorporated, public or
private an investment fund, a government or international
organization a nonprofit institution in an enterprise that operates for
profit . However, the relationship between two nonprofit institutions is excluded from direct investment
an estate, trustee in bankruptcy, or other trust, or any combination of two or more of the above
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Changes to BPM5
The Framework for Direct Investment Relationships (FDIR) adopted
Ownership of ordinary shares replaced by ownership of equity that gives rise to voting power
The relationships due to indirect voting power and fellow enterprises is elaborated
Insurance technical reserves are potentially included in direct investment
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