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1 Benchmark Definition of FDI, 4 edition (BMD4) OECD revises international standards for FDI statistics by Ayse Bertrand Manager, International Investment.

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Presentation on theme: "1 Benchmark Definition of FDI, 4 edition (BMD4) OECD revises international standards for FDI statistics by Ayse Bertrand Manager, International Investment."— Presentation transcript:

1 1 Benchmark Definition of FDI, 4 edition (BMD4) OECD revises international standards for FDI statistics by Ayse Bertrand Manager, International Investment Statistic Investment Division, Directorate for Financial and Enterprise Affairs, OECD

2 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 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

4 4 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 country 4) Research agenda

5 5 Challenges for BMD4 BOP Financial Acc. FDI (aggr) IIP FDI (aggr) BMD4 FDI statistics HEGI AMNE’s BOP Current Acc. Invest. Income Development of new Methodologies USERS’ PRIORITY - Pass through investment -M&As - UIC/IHC

6 6 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)

7 7 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

8 8 BMD4 Selected topics 1.FDIR 2.Valuation 3.Scope of FDI statistics 1.Standard features Asset/liability principle Directional principle and excluding SPEs 2Supplemental features M&As UIC/UHC

9 9 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)

10 10 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.

11 11 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; or viii.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.

12 12 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%.

13 13 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

14 14 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

15 15 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.

16 16 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.

17 17 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

18 18 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

19 19 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 enterprisesOf direct investment enterprises to direct investors A1 EquityL1 Equity A1.1 Equity transactionsL1.1 Equity transactions A1.2 Reinvestment of earningsL1.2 Reinvestment of earnings A2 Debt instrumentsL2 Debt instruments Of direct investment enterprises in direct investors- Reverse investment: Of direct investors to direct investment enterprises – Reverse investment A3 EquityL3 Equity A4 Debt instrumentsL4 Debt instruments Of direct investment enterprises in other affiliated enterprises abroad Of direct investment enterprises to other affiliated enterprises abroad A5 EquityL5 Equity A6 Debt instrumentsL6 Debt instruments

20 20 Detailed FDI Statistics - DP [BMD4] Outward Foreign Direct InvestmentInward Foreign Direct Investment Outward equity transactionsInward equity transactions A1 Equity assets of DI in DIEL1 Equity liabilities of DIE to DI A1.1 Equity transactionsL1.2 Equity transactions A1.2 Reinvestment of earningsL1.2 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 transactionsInward debt instruments transactions A2 Debt instruments assets of DI in DIEL2 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

21 21 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

22 22 Genuine FDI FDI according to immediate counterparty Problems: - Inflation of FDI - Analytical interpretation of origin/destination country origin/destination industry origin/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 23 Supplemental series FDI by type 1.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

24 24 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 equityDivestment 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 equityDivestment 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

25 25

26 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.

27 27 Ultimate investing/host country Simple example of Ultimate Investing Country Country C1 Enterprise E1 | 100% | Country C2 Enterprise E2 | 100% | Country C3 Enterprise E3

28 28 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 |

29 29 THANK YOU FOR YOUR ATTENTION


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