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. 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. 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. 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
excluding transactions through Special Purpose Entities (SPEs)
FDI by type (M&As, greenfields, extension of capital, financial restructuring)
FDI according to ultimate investing/ultimate host country
Research agenda

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

6. BMD4 Guiding principles for the revision
Need to consider evolving user requirements
Need for clarity
Need for continued international co-ordination to achieve harmonised standards (BPM, SNA, HEGI, MSTS, etc)

7. BMD4 Results of the revision
Existing recommendations remain unchanged and/or are reinforced, improved, clarified
Replacement/removal of existing recommendations.
Introduction of new recommendations.
Research agenda

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

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. 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. 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:
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.
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. 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. 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. 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. 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. 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. 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)
Recent transaction price
Market capitalisation method
Net asset value (NAV)
Including goodwill and intangibles
Excluding goodwill and intangibles
Present value
Own funds at book value (OFBV)
Apportioning global value

18. Scope of FDI Statistics
Two sets of data:
Aggregate FDI statistics [BOP Financial account & OECD BMD]
Detailed FDI statistics = OECD BMD
By partner country
By industry
Standard features
Asset/liability principle
Directional prin. & excluding funds passing through SPEs
Supplemental features
M&As
UIC/UHC

19. Aggregate FDI statistics [BPM6 & BMD4 ] Exhibit 1
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
A4 Debt instruments
L4 Debt instruments
Of direct investment enterprises in other affiliated enterprises abroad
Of direct investment enterprises to other affiliated enterprises abroad
A5 Equity
L5 Equity
A6 Debt instruments
L6 Debt instruments

20. Detailed FDI Statistics - DP [BMD4]
Exhibit 1. FDI Transactions According to the Directional Principle
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

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. 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. Supplemental series FDI by type M&As
Non-resident purchase of existing equity (10% to 100% of the voting power)
Sub-category (above 50% of the voting power)
Other types of FDI – Research agenda
Issuance of new equity
Greenfield investment
Extension of capital
Financial Restructuring

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 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
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

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

28. Ultimate investing/host country
More Complex Example of Ultimate Investing Country
Country C Country C Country C5
Enterprise E Enterprise E Enterprise E5
| | |
60% % %
Country C Country C Country C6
Enterprise E Enterprise E Enterprise E6
70% % %
______________________________________________
| Country C |
| Enterprise E |

29. THANK YOU FOR YOUR ATTENTION