2009 - Fdi Manual - Unctad

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UNCTADTraining Manualon Statistics for FDI

and the Operations of TNCs

Volume IFDI Flows and Stocks

United NationsNew York and Geneva, 2009

United Nations Conference on Trade and DevelopmentDivision on Investment and Enterprise


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ii | UNCTADTRAINING MANUAL ON STATISTICS FOR FDI AND THE OPERATIONS OF TNCs

As the focal point in the United Nations system for investment and technology, and building on 30years of experience in these areas, the United Nations Conference on Trade and Development (UNCTAD),through its Division on Investment and Enterprise (DIAE), promotes understanding of key issues,particularly matters related to foreign direct investment and transfer of technology. DIAE also assistsdeveloping countries in attracting and benefiting from FDI and in building their productive capacities andinternational competitiveness. The emphasis is on an integrated policy approach to investment, technologicalcapacity building and enterprise development.

The terms country/economy as used in this report also refer, as appropriate, to territories or areas;the designations employed and the presentation of the material do not imply the expression of any opinionwhatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country,territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. Inaddition, the designations of country groups are intended solely for statistical or analytical convenience and

do not necessarily express a judgement about the stage of development reached by a particular country orarea in the development process. The major country groupings used in this report follow the classificationof the United Nations Statistical Office. These are:

Developed countries: the member countries of the Organization for Economic Cooperation andDevelopment (OECD) (other than Mexico, the Republic of Korea and Turkey), plus the new EuropeanUnion member countries which are not OECD members (Bulgaria, Cyprus, Estonia, Latvia, Lithuania,Malta, Romania and Slovenia), plus Andorra, Israel, Liechtenstein, Monaco and San Marino.

Transition economies: South-East Europe and the Commonwealth of Independent States.

Developing economies: in general all economies not specified above. For statistical purposes, thedata for China do not include those for Hong Kong Special Administrative Region (Hong Kong SAR), MacaoSpecial Administrative Region (Macao SAR) and Taiwan Province of China.

Reference to companies and their activities should not be construed as an endorsement byUNCTAD of those companies or their activities.

The boundaries and names shown and designations used on the maps presented in this publicationdo not imply official endorsement or acceptance by the United Nations.

The following symbols have been used in the tables:

Two dots (..) indicate that data are not available or are not separately reported. Rows in tableshave been omitted in those cases where no data are available for any of the elements in the row;

A dash () indicates that the item is equal to zero or its value is negligible;

A blank in a table indicates that the item is not applicable, unless otherwise indicated;

A slash (/) between dates representing years, e.g. 1994/95, indicates a financial year;

Use of an en dash () between dates representing years, e.g. 19941995, signifies the full period

involved, including the beginning and end years;Reference to dollars ($) means United States dollars, unless otherwise indicated;

Annual rates of growth or change, unless otherwise stated, refer to annual compound rates;

Details and percentages in tables do not necessarily add up to totals because of rounding.

The material contained in this study may be freely quoted with appropriate acknowledgement.

Details and percentages in tables do not necessarily add to totals because of rounding.

The material contained in this study may be freely quoted with appropriate acknowledgement.

UNITED NATIONS PUBLICATIONSales No. E.09.II.D.2

ISBN 978-92-1-112763-8Copyright United Nations, 2009

All rights reservedPrinted in Switzerland

Note


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Preface

Many developing countries, including the least developedcountries, have attracted only small amounts of foreign directinvestment (FDI) despite their efforts at economic liberalization inan increasingly globalizing world. Moreover, FDI inflows are highlyconcentrated in a small number of countries. It is generally well knownthat the modest levels of, and disparity in, the distribution of FDIinflows, are due to factors such as a deficient regulatory framework,

a poor business environment and opportunities, weak FDI policiesand incentives, poor institutional frameworks, limited market access,unfavourable comparative costs and lack of political stability. However,what is less known is that the scarcity, unreliability and inconsistencyof data collecting and reporting systems in many developing countriescause severe problems in formulating policies and strategies relating toFDI, which in turn affects their attractiveness as host countries.

Against this background, UNCTAD has prepared this three-

volume manual with the aim of helping developing countries toenhance the capacity of their government agencies to compile, analyseand disseminate data on FDI and the operations of transnationalcorporations (TNCs), based on internationally recommended standards.The manual should enable national authorities to maintain high-qualityand up-to-date databases by providing them with concrete and practicalguidance on how to collect and report FDI and TNC statistics (volumesI and II) and how to establish an FDI statistical system (volume III). Themanual comprises the following volumes:

Volume I: FDI Flow and Stock Data

Volume II: Statistics on the Operations of Transnational Corporations

Volume III: Collecting and Reporting FDI/TNC Statistics:Institutional Issues

Volume I stresses the importance of collecting data on FDIflows and stocks in line with international definitions and standards.It provides definitions and an overview of the existing standardsset or used by international organizations and national compilers. It


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then discusses and evaluates different approaches to compiling FDIflow and stock data, identifies data complexities and problems, and

presents solutions to each of them. International guidelines on FDIdata compilation need to take into account recent practices emanatingfrom globalization, and therefore they need to be constantly updatedto reflect current practices (such as mergers and acquisitions) and newrequirements. This volume therefore also discusses issues and areasthat need further attention.

Data on the activities of foreign affiliates can be an importantcomplement to the FDI data contained mainly in balance of payments

(BOP) statistics (volume I). This is the subject of volume II. In manycases, this data set conveys a clearer picture of the economic activitiesof foreign affiliates and their importance to the host economy. Financialand operations data, such as those relating to assets, employment,exports and imports, are important as they enable policymakers toassess the economic impact of FDI and to design policy measures gearedto maximizing the benefits of inward FDI for their country. Data onthe operations of home-country TNCs are equally important to enablepolicymakers to monitor the performance of these TNCs affiliates and

assess the integration of their country into the global economy throughits outward investment.

Information of such type is more difficult to obtain than BOP-related information. It requires extra effort by statistics agencies,often through surveys of foreign affiliates and TNCs operating in thedomestic economy. Volume IIcontains clearly defined instructions anddefinitions to help officials from relevant institutions in developingcountries to compile and process financial and operations data of TNCs

in their economies.Volume IIIprovides an overview of the methodologies being used

in the countries where FDI and TNC data are collected and reported. Theaim is to examine how the surveys are actually conducted and how thework of various institutions is coordinated. Based on the findings, bestpractices of standard survey questionnaires are provided. Countriesthat have no dedicated office for reporting FDI statistics are advisedto establish such an office. The volume discusses where and how an

FDI statistics office could be established, the different sources of FDIstatistics, and how their data are reported. It stresses the importance of


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coordination and harmonization of reporting and dissemination of FDIstatistics.

Volume IIIalso aims to assist developing countries in achievingthe development objective of strengthening cooperation within theirregions and with other regions in the area of FDI and TNC datacollection and coordination through human resources developmentand capacity-building.

All three volumes of this manual cover the elements requiredfor the countrys FDI statistics authorities to collect and report FDIand TNC data effectively. It is hoped that the manual, together withsome training, will help developing countries establish FDI and TNCstatistical systems that will be able to present useful, timely, accurateand comparable FDI and TNC statistics. Each volume attempts topresent relevant issues, identifying problems and providing solutionsthat are illustrated by concrete examples. Best practices are alsosuggested. These examples and practices are collected from variouscountries, including developing countries.

September 2009 Division on Investment and EnterpriseUNCTAD


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Acknowledgements

The UNCTAD Training Manual on Statistics for Foreign DirectInvestment and the Operations of Transnational Corporations wasprepared and finalized by Masataka Fujita with draft inputs from FrankChow (volume I), David Buxton (volume II) and Emanuela Balestrieri(volume III) under the general guidance of Anne Miroux. Majorinputs and comments were also received from Wan Ramlah, AstritSulstarova and Katja Weigl. Production was carried out by Katia Vieu.It was edited by Praveen Bhalla and desk-top published by TeresitaVentura. Cooperation with FDI statisticians and relevant national andinternational statistical authorities (e.g. IMF, OECD) dealing with FDIand TNC data was also essential. The preparation of this manual waspartly financed by the United Nations development account project(2008-2009), Support to decision-making and policy formulation onforeign direct investment in the context of the Millennium Development

Goals and the Monterrey Consensus, and by the joint ESCWA/UNCTAD project, Strengthening networking and expertise on FDI inESCWA member countries, which was undertaken in 20042006.


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Contents

PREFACE iii

ACKNOWLEDGEMENTS vi

ABBREVIATIONS xii

INTRODUCTION 1

CHAPTER I BALANCE OF PAYMENTS AND INTERNATIONALINVESTMENT POSITION FRAMEWORK 11

A. Basic structure ..................................................................................................11B. Accounting and recording issues ..................................................................19

1. Double-entry accounting..........................................................................192. Debits and credits ......................................................................................203. Net recording .............................................................................................214. Time of recording and valuation.............................................................245. Currency conversion.................................................................................31

CHAPTER II FOREIGN DIRECT INVESTMENT 35A. Definition of foreign direct investment ...............................................................35B. Direct investor/direct investment enterprise..............................................44C. Components of direct investment capital ....................................................49D. Directional basis for FDI. ................................................................................58E. Reconciliation of FDI flows and stocks.........................................................60F. Direct investment transactions ......................................................................62G. Reinvested earnings.........................................................................................73

1. Concepts ....................................................................................................732. Collection methodologies........................................................................77

(a) Inward FDI.........................................................................................77(b) Outward FDI .....................................................................................84

H. Classification by geographical area...............................................................861. FDI flows ...................................................................................................862. FDI stocks. .................................................................................................91

I. Classification by economic activity ...............................................................91

CHAPTER III GREENFIELD FDI AND CROSS-BORDER MERGERSAND ACQUISITIONS 97

A. Greenfield FDI..................................................................................................97B. Cross-border M&As ........................................................................................98

CHAPTER IV SOURCES OF FDI FLOW AND STOCK DATA 109


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1. International Transactions Reporting System ...................................1092. Enterprise surveys .................................................................................1113. Administrative sources .........................................................................115

CHAPTER V MEASURING FDI FLOW AND STOCK DATAFROM FINANCIAL STATEMENTS 117

A. Balance sheet ..................................................................................................118B. Income statement...........................................................................................123C. Statement of reinvested earnings ................................................................123D. Statement of changes in the financial position..........................................124E. Sample survey form......................................................................................127

REFERENCES 139SELECTED UNCTAD PUBLICATIONS ON TNCs AND FDI 141

QUESTIONNAIRE 149

Boxes

Box I.1. Basic reference materials on FDI concepts..................................................2Box I.2. Statistical publications and other materials relevant

to FDI statistics................................................................................................5Box I.3. Recording outward and inward FDI transactions.....................................9Box I.4. FDI versus foreign porfolio investment and other investments ...........17Box I.5. Examples of FDI debits and credits ...........................................................22Box I.6. Netting of assets and liabilities...................................................................24Box I.7. Analysis and description of the financial account...................................25Box I.8. FDI stock of the United States, at historical cost,

market value and current cost....................................................................28Box I.9. International investment position of Sweden ..........................................29Box I.10. Readjusting transfer values: an example ..................................................32Box I.11. Examples of currency conversion..............................................................33

Box I.12. Country of residence....................................................................................36Box I.13. Definition of foreign direct investment.....................................................38Box I.14. Measuring the level of foreign control in the balance sheet ..................43Box I.15. Majority-owned foreign affiliates as the predominant type of

investment: the case of Canada..................................................................44Box I.16. Special purpose entities...............................................................................45Box I.17. Offshore enterprises.....................................................................................46Box I.18. Financial information on privately owned foreign affiliates .................46Box I.19. Framework for foreign direct investment relationships.........................47Box I.20. Definition and examples of direct investment enterprises ....................50

Box I.21. Initial transactions and all subsequent transactions: examples.............52Box I.22. Example of outward FDI components ......................................................55


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Box I.23. Example of inward FDI components.........................................................57Box I.24. Price changes in securities...........................................................................61Box I.25. Exchange rate changes.................................................................................61Box I.26. Reclassifications............................................................................................62Box I.27. Write-offs.......................................................................................................63Box I.28. Expropriations ..............................................................................................63Box I.29. Measurement errors.....................................................................................64Box I.30. Treatment of construction activity.............................................................65Box I.31. Real estate......................................................................................................66Box I.32. FDI in the banking sector ............................................................................66Box I.33. FDI in natural resource exploration...........................................................67Box I.34. Mobile equipment ........................................................................................67Box I.35. Recording of FDI transactions....................................................................68

Box I.36. Recording of reinvested earnings ..............................................................75Box I.37. Ultimate beneficial owner or immediate foreign investor .....................87Box I.38. Identifying the UBO: examples from the United States and Austria ..88Box I.39. Cases where use of the debtor/creditor or transactor

principles yield same country allocation .................................................. 89Box I.40. Country classification for transactions involving third parties.............90Box I.41. Statistical Classification of Economic Activities in the

European Community (NACE ) applied by EU member countries .....92Box I.42. Classification of FDI by industry and sector:

the case of United States..............................................................................93Box I.43. Differing economic activities of parent firms and their

foreign affiliates ...........................................................................................94Box I.44. Outward FDI by economic activity: the German case ............................96Box I.45. M&A transactions in the BOP of the United Kingdom ........................101Box I.46. Revising FDI data to account for M&A transactions:

the case of the Belgium-Luxembourg Economic Union ....................... 103Box I.47. Information required on M&A transactions ..........................................104Box I.48. Registering M&A transactions based on

press reports: the case of Statistics Canada ............................................ 105Box I.49. Example of quarterly survey of FDI flows: Canada..............................112Box I.50. Enterprise survey: Malaysia .....................................................................114

Box I.51. Calculating FDI from balance sheets.......................................................119Box I.52. Illustration of an income statement .........................................................123Box I.53. Illustration of a statement of reinvested earnings.................................123Box I.54. Illustration of a statement of changes in the financial position........124

Tables

Table I.1. Balance of payments ..............................................................................13Table I.2. International investment position: standard components

in the direct investment category. ....................................................... 14Table I.3. Babylonia: International investment position, reconciliation

of financial transactions and stock positions at year-end ................ 15


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Table I.4. Current account: standard components in theinvestment income category.................................................................19

Table I.5. Retained earnings of reporting enterprises withnon-resident direct investors................................................................81

Table I.6. Retained earnings of foreign affiliates(direct investment enterprises).............................................................85

Table I.7. Sample enterprise questionnaire on internationalpositions and international transactions...........................................128

Figures

Figure I.1. An organizational scheme of a TNC. .................................................. 49Figure I.2. Share of different financing components in world

FDI inflows, 19952004..........................................................................74Figure I.3. Structure of cross-border M&As .........................................................99

Box figures

Box figure I.19.1. Foreign direct investment relationships .................................... 48

Box tables

Box table I.7.1. Financial account of Babylonia: direct investment,by type of capital, quarterly and annual ...................................25

Box table I.16.1. FDI inflows in Luxembourg, distributed betweenSPEs/trans-shipped FDI and non-trans-shipped FDI,20022005........................................................................................45

Box table I.35.1. ABC (Babylonia) Ltd: Balance sheet beforeinvestment as at 31 December 2000............................................68

Box table I.35.2. ABC (Babylonia) Ltd: Balance sheet afterinvestment with cash as at 31 December 2000 .......................... 69

Box table I.35.3. ABC (Babylonia) Ltd: Balance sheet afterinvestment through capital goods as at 31 December 2000 ....71

Box table I.35.4. ABC (Babylonia) Ltd: Balance sheet after

investment through provision of services as at31 December 2000..........................................................................72Box table I.44.1. Germany: outward FDI stock by economic activity

of parent TNCs and foreign affiliates, 1997 and 2000..............96

Annex

Annex I. Registers of direct investment enterprises and of direct investors:collecting information on FDI ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... 131


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CHAPTER I MEASURING THE ACTIVITIES OF TNCS: CONCEPTSAND DEFINITIONS II.9-II.61

CHAPTER II OPERATIONAL VARIABLES II.62-II.106

CHAPTER III DATA AND COMPILATION ISSUES II.107-II.174

Contents of Volume II

Statistics on the Operationsof Transnational Corporations

Contents of Volume IIICollecting and Reporting FDI/TNC

Statistics: Institutional Issues

CHAPTER I INSTITUTIONAL ARRANGEMENTSFOR COLLECTING AND REPORTINGFDI STATISTICS III.5-III.44

CHAPTER II ORGANIZATIONAL ISSUES INFDI STATISTICS III.45-III.101


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Abbreviations

BD3 OECD, Benchmark Definition of Foreign Direct Investment, third edition, 1996BD4 OECD, Benchmark Definition of Foreign Direct Investment, fourth edition, 2008BOP balance of paymentsBPM5 IMF, Balance of Payments Manual, fifth edition, 1993ECB European Central BankEU European UnionFATS Foreign AffiliaTe StatisticsFDI foreign direct investment

FPI foreign portfolio investmentGAAP Generally Accepted Accounting PrinciplesGATS General Agreement on Trade in ServicesIIP international investment positionIMF International Monetary FundIASC International Accounting Standards CommitteeISIC International Standard Industrial Classification of all Economic ActivitiesITRS International Transactions Reporting SystemM&A merger and acquisitionNACE Nomenclature statistique des activits conomiques

dans la Communaut europenneOECD Organisation for Economic Co-operation and DevelopmentR&D research and developmentSNA System of National Accounts 1993SPE special purpose entityTNC transnational corporationUBO ultimate beneficial ownerUNCTAD United Nations Conference on Trade and DevelopmentWTO World Trade Organization


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INTRODUCTION

This volume of theI.1.UNCTAD Training Manual,together with two other volumes,

aims to assist developingcountries to compile timely,accurate and internationallycomparable statistics on foreigndirect investment (FDI) and onthe operations of transnationalcorporations (TNCs). The overallobjective is to promote a betterunderstanding of the FDI situation

in their respective economiesand to assist policymakers informulating development-orientedFDI policies.

The development of FDII.2.statistics has to a large extentbeen stimulated by the need tounderstand the importance of FDI

for development and to assessthe extent to which a country hassucceeded in attracting this sourceof finance. Thus the developmentof the various concepts anddefinitions has been closelyassociated with the issues thathave evolved over time within theframework of the international

balance of payments (BOP).

However, FDI is moreI.3.than only a BOP concept; indeed,it has taken on a life of its own.

There is considerable focus onFDI in the media nowadays, notonly in specialized journals andprogrammes but also in generalones. A wider audience is nowinterested in FDI, but there is notnecessarily a good understandingof the concept. Moreover, althoughit is intrinsically international,it is frequently used withoutan understanding of this basicprinciple. A major objective ofvolume I of this Training Manual isto help clarify a number of issuesrelating to the definition of FDIand the use of FDI statistics (part ofTNCs activities) for the benefit ofspecialists as well as the public atlarge.

I.4. The concepts anddefinitions of BOP and FDIrecommended in this TrainingManual are consistent withinternational standards, asdocumented in the referencematerials described in box I.1. Usersmay refer to these publications for

further discussions of the variousconcepts.


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International Monetary Fund (IMF), Balance of PaymentsManual,fifth edition, 1993 (BPM5).BPM5 presents the conceptualframework of the BOP andthe international investmentposition (IIP). It providesguidance to member countriesof the IMF in the compilation ofstatistics for their BOP and IIP

statements. Two complementarypublications publishedsubsequently by the IMF providemore practical guidance fora better understanding of theconcepts contained in the 1993publication. The IMF Balanceof Payments Compilation Guide,published in 1995, containssample forms for the collection

of data for the compilation ofBOP and IIP statements. TheIMF Balance of Payments Textbook,published in 1996, containsreference material for the BOPcourses provided by the IMF,and offers concrete illustrationsand examples. In 2000, the IMFpublished Financial Derivatives: A Supplement to the Fifth

Edition (1993) of the Balanceof Payments Manual, whichwas followed by an updatededition in 2002 that incorporatesfinancial derivatives into theBOP and IIP structures. The IMFDirect Investment Methodology:Recommended Treatment of SelectedFDI Transactions clarified someconfusing issues, including

FDI transactions with affiliated

financial intermediaries,payments associated with theacquisition of a right to undertakean FDI, and the closure of anFDI enterprise established fornational resources exploration.These issues were subsequentlyexamined in discussions withvarious groups, including theOrganisation for Economic Co-

operation and Development(OECD) and the EuropeanCentral Bank (ECB). Followingthese discussions, a new BOPmanual BPM6 was adoptedin 2008, and will be released in2009/2010. The main changes inBPM6are related to globalizationand financial innovation, andsupport the increased focus

on balance sheet analysis. Therevised manual gives moreprominent attention to stocksor positions of external financialassets and liabilities.OECD Benchmark Definition ofForeign Direct Investment ThirdEdition, 1996 (BD3). This OECDpublication provides detailedoperational guidance on how

FDI data should be compiledto meet internationally agreedstandards (OECD, 1996: 3).It covers the concepts anddefinitions of FDI, and specificissues and transactions relating tosuch investment. The definitionof FDI in BD3 is fully consistentwith BPM5. Certain FDI issuesand problems are covered

Box I.1. Basic reference materials on FDI concepts

/...


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in more detail in BD3. Thedefinition of FDI has changedand evolved since the firstedition of these two publications.To be consistent with the IMFsrevised BOP Manual, the fourthedition of the OECD publicationwas released in April 2008. Itimproves on existing conceptsand definitions in light of

national practical experiences,and incorporates concepts anddefinitions on elements missingfrom the previous edition (suchas, cross-border mergers andacquisitions (M&As), specialpurpose entities and ultimateinvesting country).E C / I M F / O E C D / U N /UNCTAD/WTO Manual onStatistics of International Tradein Services. This publication,primarily for statisticalcompilers, attempts to meet theneeds of both producers andusers of statistics on internationaltrade in services. It covers tradein services between residentsand non-residents, and servicesprovided by locally establishedforeign-owned enterprises. Thelatter transactions are referredto as foreign affiliates tradein services (FATS) statistics.a

The publication builds uponexisting agreed standards forthe compilation of statisticson trade in services and is

linked to BPM5 which containsrecommendations for thecompilation of services statisticswithin the BOP framework.This manual is also linked tothe United Nations Systemof National Accounts (SNA),which contains much of thefoundations for the publicationsrecommendations concerning

data on services provided bydirect investment enterprises(see chapter II.B). The objectiveof the publication is to promotecomparability of publishedstatistics on international tradein services. In particular,transactions between relatedparties are highlighted in orderto gain insight into the degree

to which the globalization ofservices is taking place. Themanual explains four modesthrough which services maybe traded internationally(as described in the WTOGeneral Agreement on Tradein Services (GATS), 1995). Ofthese, Mode 3 on commercialpresence describes TNCs that

supply services internationallythrough the activities of theirforeign affiliates abroad. Thesecond edition, to be issued in2009, will be consistent withthe IMFs revised BOP Manualand OECDs BD4. There are noother significant changes in thisrevision.

Box I.1. Basic reference materials on FDI concepts (continued)

/...

a

In the latest revision of MSITS, FATS is referred to as Foreign AffiliaTes Statistics.


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2008, provides new methodologiesand definitions of FDI, while theIMF Manual is scheduled to be

released in 2009/2010. The basicprinciples remain the same (boxI.1). There are some amendmentsand some new supplementarydetails1 (e.g. on mergers and1 The supplementary details to beintroduced in the new guidelines by bothIMF and OECD will be distinguishedfrom standard components, and canbe considered by countries as optionswhen a particular issue is of interest topolicymakers.

United Nations

System of National Accounts, 1993 (SNA). The BOPis an integral part of the broadersystem of national accounts,which presents economic statisticsfor a country. As a result, it usesthe same concepts and definitionson such issues as residency, timeof recording, valuation, incomeflows, foreign financial assets

and liabilities. The compiled datafor the BOP and the IIP are partof the account on the rest of theworld of SNA.Eurostat, Balance of PaymentsVademecum, March 2002. TheVademecum is a reference workthat describes Eurostats needsfor BOP statistics. It is intended tohelp statisticians in the membercountries of the European Union(EU) meet those needs. Ofparticular interest for non-EU

countries collecting operationalstatistics is the questionnaire onforeign affiliates trade statistics,turnover, employment and valueadded (Eurostat 2002:147169),which EU member countriesare required to complete. Thisquestionnaire provides a brief(one page) discussion of someimportant statistical issues and

priorities. The updated versionof the Balance of PaymentsVademecum, December 2008,reflects the enlargement ofthe euro area and the plannedamendments to the BOPregulations. The enlargement ofthe euro area has implicationsfor: (i) data dissemination byEurostat and the EuropeanCentral Bank on euro areaaggregates, and (ii) reportingrequirements for the MemberStates (Eurostat, 2008:5).

Box I.1. Basic reference materials on FDI concepts (concluded)

There are also dataI.5.sources for information on FDIconcepts, definitions, sources and

compilation methods (box I.2). Forinstance, a number of publicationsof regional and internationalorganizations contain informationon the methodology for directinvestment statistics.

Revisions of two majorI.6.references, IMFs Balance ofPayments Manual and OECDsBenchmark Definition, have beencompleted. The latter, released in


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Balance of Payments StatisticsYearbook of the IMF is an annualpublication that contains BOPdata by country listing. There isan aggregated presentation aswell as a detailed presentationfor the current account, capitalaccount and financial account.International investment positiondata (i.e. on financial assets andliability stocks) are also provided.There are notes for each countryindicating how the figureswere compiled and the itemsthat diverge from the conceptsand definitions of BPM5. Thequarterly data in aggregateform are published in the IMFsInternational Finance Statistics.

International Direct Investment

Statistics Yearbook of the OECDis an annual publication thatprovides detailed statistics oninward and outward FDI forOECD member countries. Itcontains FDI flow and stockdata for each member country,broken down by region andselected partner countries, as

well as by sector and industry.Also included are technical notesindicating the sources, methods,concepts and definitions usedby each country to compile FDIstatistics.Measuring Globalisation: The Role ofMultinationals in OECD Economiesis another OECD publication. The2007/08 edition has two volumes,

one covering the manufacturing

sector and the other the servicessector. They contain statisticaldata on the percentage sharesof the OECD member countriesthat are controlled by TNCsat a global and sectoral level.The shares of industries underforeign control are providedusing 18 variables, includingnumber of enterprises, numberof employees, production,turnover, value added, totalexports and gross operatingsurplus. However, thispublication does not contain anyFDI flow and stock data.The IMF and OECD have also jointly published a Survey ofImplementation of Methodological

Standards for Direct Investment(SIMSDI). This document and itsrelated materials metadata andcross-country comparison tables contain a wealth of informationabout country practices thatFDI experts consider to beimportant. The metadata followa standard structure, clearlyindicate whether a particular

countrys practices are inaccordance with internationalstandards and give contactdetails for the FDI compilers ineach country who could answermore detailed queries aboutcompilation practices. TheSIMSDI was first launched in1997 and has since been updatedtwice, most recently in 2003 (The

2003 edition is entitled, Foreign

Box I.2. Statistical publications and other materials relevantto FDI statistics

/...


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Direct Investment Statistics: HowCountries Measure FDI in 2001).Eurostat issues a European UnionDirect Investment Yearbook. Theyearbook is published annuallyand presents FDI flow and stockdata for the 27 EU membercountries as well as for otherselected countries. Data are

broken down by region andselected country, as well as bysector and industry, and includea breakdown of FDI income.The yearbook also presentsa breakdown by intra- andextra-EU FDI flows and stocks.A technical annex describesdata compilation methodologyand definitions applied by the

reporting countries.The European CentralBank (ECB) has two usefulpublications: European UnionBalance of Payments/InternationalInvestment Position StatisticalMethods, andAccession Countries:Balance of Payments/InternationalInvestment Position StatisticalMethods. These publications

provide information on statisticalmethods and definitions appliedby national compilers of BOPand IIP statistics in the respectiveregions.UNCTADs annual WorldInvestment Reports (WIR) provideup-to-date data and analyseson trends in global FDI, alongwith an in-depth examination of

selected themes related to TNCs.A comprehensive statisticalannex presents the latest dataon worldwide inward andoutward FDI flows and stocks,including variables relating tothe importance of internationalproduction systems, cross-border M&A deals and other datarelevant to TNCs. For instance, italso includes a TransnationalityIndex, FDI Inward Potentialand Performance Indices, anda section on the top 100 TNCsworldwide as well as the top 100from developing countries.UNCTADs World InvestmentDirectory (WID) series assemblescomprehensive data and

information on FDI and theoperations of TNCs on a regionalbasis. The series can be aninvaluable source of informationfor assisting the formulationand monitoring of policiesrelating to FDI and TNCs at thelevel of individual countries andregions. Each volume includesan introduction analysing the

trends and patterns of FDI inits respective region as wellas recent developments in theFDI regulatory framework ofindividual countries basedon information containedin country profiles, forevery country of the region.Also included is a technicalintroduction on methodological

issues related to FDI and TNC

Box I.2. Statistical publications and other materials relevantto FDI statistics (continued)

/...


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acquisitions (M&As), specialpurpose entities, and roundtripping) in these forthcoming

guidelines on direct investmentflows and positions, but inthe main, they are expected toremain unchanged or to aligneven more closely with nationalaccounting standards. One aimof the recommendations for newbreakdowns of FDI included inthe OECDs Benchmark Definitionis to improve the consistency

statistics. Each country profilecontains a detailed definition ofFDI as well as a brief descriptionof investment trends andthe investment policy andlegal framework. Inward andoutward FDI flows and stocks,with sectoral and regionalbreakdowns (and, whereavailable, by country and byindustry) are also presented. Inaddition, data on the operationsof foreign affiliates in the hosteconomy, the operations of TNCsabroad, as well as the operationsof parent TNCs are included.Furthermore, the series providestables on the laws, regulationsand treaties on FDI and a listof the largest foreign affiliatesand of the largest TNCs foreach country. A bibliographyof relevant secondary sourcesof data on FDI and TNCs is also

included in each country profile.Country profiles are based ondata provided to the UNCTADsecretariat. It should be pointedout, however, that dataavailability, the number of tablesand details of data presentedtend to vary by country. TheWID series has been publishedsince 1992 and consists of thefollowing volumes: Asia and thePacific (vols. I and VII), Centraland Eastern Europe (vols. IIand VIII), Developed Countries(vol. III), Latin America (vols.IV and IX), Africa (vols. V andX) and West Asia (vol. VI).Updates for various regions arecurrently under preparation.WID volumes and the countryprofiles contained in them arenow published in hard copy,on CD-ROM as well as online(www.unctad.org/fdistatistics).

between statistics on FDI andthose on the activities of TNCs.2

2 This point was discussed atUNCTADs Expert Meeting onCapacity Building in the Area ofFDI: Data Compilation and PolicyFormulation in Developing Countries,Geneva, 12-14 December 2005 (see thereport of this meeting, TD/B/COM.2/EM.18/3, 9 January 2006). It was alsodiscussed as one of the main agendaitems at the OECDs Working Partyon the Globalization of Industry and

the Working Group on InternationalInvestment Statistics in 2008. This issuecontinues to be discussed at this OECD

Box I.2. Statistical publications and other materials relevantto FDI statistics (concluded)


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in direct investment but also inportfolio and other investmentcapital from foreign sources thathave invested in Babylonianenterprises. Moreover, theBabylonian affiliates may havefinancial claims on non-residentsthrough direct investment assets,portfolio investment in foreignsecurities and other investmentclaims on foreign entities, such astrade receivables. Besides thesefinancial account transactions forthe Babylonian direct investmententerprises, the BOP compiler isalso interested in any other typeof international transactions thatthe Babylonian enterprise maybe involved in, particularly withrespect to the current account.These transactions need notbe with only the foreign directinvestor; they could also be withother, unaffiliated foreign parties.The Babylonian affiliates may havetransactions such as interest anddividend receipts and payments,freight and shipping transactionsand international commercialservices, which are needed forcompiling current account statistics.

For BOP compilers thereis a substantial difference inapproach for FDI enterpriseswithin an economy and directinvestment enterprisesa locatedin other economies. For example,for a compiling country (suchas Babylonia), information iscollected from corporate investorsin Babylonia regarding their directinvestments in other countries. Withrespect to the direct investmententerprises located in foreigncountries, the BOP compiler hasto try and collect information fromthe Babylonian direct investorsconcerning only their directinvestment transactions withthose foreign affiliates. Althoughthe foreign affiliate may haveother types of financial liabilities(portfolio and other investments)with other Babylonian enterprises,the Babylonian direct investorwould not normally be the sourceof those financial transactions.

For direct investmententerprises within the Babylonianeconomy, the Babylonian BOP

compiler is interested not only

Box I.3. Recording outward and inward FDI transactions

a FDI enterprise and direct investment enterprise express the same concept and areused interchangeably.


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CHAPTER I. BALANCE OF PAYMENTS

AND INTERNATIONAL INVESTMENTPOSITION FRAMEWORK

A. Basic structure

For a better understandingI.10.

of direct investment, it isnecessary to gain knowledge ofthe larger picture of the standardcomponents of a balance-of-payments (BOP) framework.The BOP is a statistical statementthat systematically summarizes,for a specific time period, theeconomic transactions of an

economy with the rest of theworld. The BOP comprises threeaccounts: the current account,capital account and financialaccount. A typical BOP statementof a country (e.g. Babylonia) ispresented in table I.1. The currentaccount covers internationaltransactions in goods, services,

income and current transfers. Thecapital account covers largelyinternational capital transfers.The financial account coversfinancial assets and liabilitiestransacted between residentsand non-residents. The five basiccomponents of the financialaccount are: direct investments,portfolio investments, financial

derivatives,3other investments andreserve assets. This is essentiallya functional breakdown. Fordirect investments, portfolioinvestments, financial derivativesand other investments, there is abasic distinction between financialassets and financial liabilities.

The asset side of anI.11.economy is referred to as outwardforeign direct investment (FDI),whereas the financial liabilityof an economy is called inwardFDI or direct investment in thereporting economy. For example,the BOP statement for Babyloniawould list the following asset andliability categories: Babyloniandirect investment abroad andinward direct investment in

Babylonia respectively.Because of the nature ofI.12.

the BOP concept, it would bedifficult to compile flows only ofdirect investment or of flows andstocks only of direct investmentoutside a BOP framework. This isbecause direct investment is just

3 This is a new component that hasbeen added to the financial account(see IMF, 2000).


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of the claims and the source(s) offinancing, on the liability side of

corporate balance sheets.FDI stocks are presentedI.14.

in the statistical statement of theinternational investment position(IIP). The IIP is a statement ofan economys stock of externalfinancial assets and liabilities ata particular point in time. The

classification scheme used for theIIP is similar to that used for the financial account, and reflects theclose relationship between theIIP statement, shown in table I.2(only for FDI components), andthe external financial assets andliabilities of the BOP as indicatedin table I.1.

It is important to note theI.15.close relationship between theBOP flow-oriented framework,particularly of the financialaccount, and the IIP stock-orientedframework. Reconciliation of theflow activities in the financialaccount with a change in stocks

made during a defined periodis the responsibility of the BOPcompiler. The BOP accountsrecord reflects only transactions;on the other hand, a change instocks appearing in the IIP canbe attributable to transactions(financial account flows), tovaluation changes due to changes

in exchange rates and prices, andto other adjustments (table I.3).

one financial item among manyfinancial categories, which needs

to be identified and compiledconsistently for the financialaccount of the BOP. Moreover,there is an interrelationshipbetween direct investment andother accounts of the BOP (suchas return on investment, which isreflected in the investment incomecategory). In addition, there

may be services rendered by theforeign parent to the subsidiary,which would be included in theservices category of the currentaccount.

Direct investment isI.13.measured from the liability side ofthe balance sheet. For compiling

BOP, it is necessary to knowthe source of the capitalizationand of the liability claims on acorporation with respect to theportion that comes from foreignsources. There may be numeroustypes of claims on a directinvestment enterprise, such asbonds held by foreign investors

(i.e. foreign portfolio investmentliabilities/debt securities) orloans from foreign banks (i.e.other investment liabilities/loans) or trade payables to foreignexporters (i.e. other investmentliabilities/other liabilities). Inmuch the same way as for FDI, portfolio investments and otherinvestments in the corporate sectorare compiled, based on the holder


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Table I.1. Balance of payments

BOP itemsCurrent accountReceipts (credits)A. Goods and services

GoodsServices

B. Income1. Compensation of employees2. Investment income

2.1 Direct investmentIncome on equity

Dividends and distributed branch profitsReinvested earnings and undistributed branch profits

Income on debt (interest)

2.2 Portfolio investment2.3 Other investmentC. Current transfers

Payments (debits)A. Goods and Services

GoodsServices

B. Income1. Compensation of employees2. Investment income

2.1 Direct investmentIncome on equity

Dividends and distributed branch profitsReinvested earnings and undistributed branch profitsIncome on debt (interest)

2.2 Portfolio investment2.3 Other investment

C. Current transfers

(*) (

*)

Capital and Financial AccountA. Capital accountB. Financial account

1. Direct investment1.1 Abroad

Equity capital

Claims on affiliated enterprisesLiabilities to affiliated enterprisesReinvested earningsOther capital

Claims on affiliated enterprisesDebt securities issued by affiliated enterprisesOther claims on affiliated enterprises

Liabilities to affiliated enterprisesDebt securities issued by direct investorsOther liabilities of direct investors

1.2 In the reporting economyEquity capital

Claims on direct investorsLiabilities to direct investors

Reinvested earnings

/...


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Table I.3 shows the mainI.16.components of Babyloniasexternal assets and liabilities forthe current year-end and theprevious year-end. The factorscontributing to changes in thestock value during the year foreach of the financial componentsare presented in summary form.Transactions consist of the netflows of financial capital that arerecorded in the financial accountof the BOP. In this reconciliation

table, the net flows for each ofthe financial assets would bepresented with the reverse sign asrecorded in the financial account.

Measurement errors canI.17.have an impact on reconciliationof the BOP and IIP statements.This is particularly true when,

for example, different sources areused to measure flows and stocks

Table I.1. Balance of payments (concluded)

BOP itemsOther capital

Claims on direct investorsDebt securities issued by direct investorsOther claims on direct investors

Liabilities to direct investorsDebt securities issued by affiliated enterprisesOther liabilities to direct investors

2. Portfolio investment3. Other investment4. Reserve assets

Source: Based on IMF, 1993: 132-138.Note: Shaded areas reer to FDI statistics.

___*___ indicates corresponding items.

Table I.2. Internationalinvestment position: standard

components in the directInvestment category

Assets

Direct investment abroad

Equity capital and retained earnings

Other capital

Liabilities

Direct investment in reporting economy

Equity capital and retained earnings

Claims on direct investors

Liabilities to direct investors

Other capital

Claims on direct investors

Liabilities to direct investors

Source: Based on IMF, 1993: 108 and110.


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stockpositio

nsatyear-end

IIPite

ms

Positionatbeginning

ofyear

Tra

nsactions

Price

changes

Exchan

gerate

chan

ges

Other

adjustments

Position

atend

ofyear

Babylonianassets

B

abyloniandirectinvestmentabroa

d

P

ortfolioinvestment

Foreignbonds

Foreignstocks

Foreignmoneymarket

F

inancialderivatives

O

therinvestments

Loan

Deposits

Otherassets

R

eserveassets

Total

assets

Babylonianliabilities

D

irectinvestmentinBabylonia

P

ortfolioinvestment

Babylonianbonds

Babylonianstocks

Babylonianmoneymarket

F

inancialderivatives

O

therinvestments

Loans

Deposits

Otherliabilities

Total

liabilities

Netin

ternationalinvestmentposition

Sou

rce:BasedonIMF

,1993:108

.

Note:

ShadedareasreertoFDI.SeetableI.2orcompone

ntsoFDIstock

.


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derivatives, other investmentsand reserve assets has been

designed to show the intentionor motivation of the investor.Except for the last item, there areasset and liability distinctions forthe other four financial accountcategories. Direct investment, thetopic of this Manual, is definedand described in chapter II.

I.20. Portfolio investment isa type of investment coveringtransactions in equity and debtsecurities. Debt securities arebroken down into bonds andnotes, stocks and money marketinstruments. Financial derivativesare another type of investment,treated separately from portfolio

investment in the financialaccount. Other investments is aresidual grouping comprisinga myriad of investments suchas short-term and long-termtrade credits, loans, currencyand deposits, and other accountsreceivables and payables. Aswith portfolio investment (and

financial derivatives), the otherinvestments category has noinfluence on the managementof the investee entity. For theinstruments and claims classifiedunder other investments, thereis generally no market on whichthey can trade. FDI is clearlydifferentiated from these other

investments in terms of the natureof the investment (box I.4).

of financial assets and liabilities.Measurement errors can also

arise as a result of faulty reportingby respondents and the use ofsampling to collect inputs.

Retained (reinvested)I.18.earnings, which are an intrinsiccomponent of shareholdersequity, are used in conjunctionwith the value of the shares for

determining the value of thestock of direct investment. Forcountries that do not recordreinvested earnings accruing toforeign direct investors in theBOP, it may be necessary to addreinvested earnings as an additionalitem in the heading of table I.3 forreconciliation of FDI flows and

stocks.In the sixth edition of theI.19.

Balance of Payments Manual BPM6 of the International MonetaryFund (IMF), the expanded capitaland financial accounts enable agreater degree of harmonizationand integration with the Systemof National Accounts (SNA). Thecapital and financial accounts,renamed from the former capitalaccount, show the net acquisitionof financial assets and the netincurrence of financial liabilitieswith the rest of the world. Theclassification of the capital andfinancial accounts by type ofinvestment or by functionalbreakdown direct investments,portfolio investments, financial


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Box I.4. FDI versus foreign portfolio investment and other investments

Direct investors have differentinvestment motives than investorsin portfolio and other investments.Direct investors intend to have long-term relationships with foreigncompanies by investing sufficientfinancial capital in the equities ofthose companies to enable them tohave a significant influence on theirmanagement. Investors in portfolioor other investments may alsohave a long-term outlook, but theyhave no intention of establishing arelationship with the managementof the foreign entities. Theseinvestors, referred to as portfolioinvestors, either invest relativelysmall amounts in the voting sharesof the foreign companies or acquireother types of claims, such as debt,on the foreign entity.

Portfolio investors areconcerned about the security oftheir investments in the foreigncountry. They are primarilyinterested in the rate of returnon their investments in the formof dividends on equities and/orinterest on debt. Other reasonsmotivating portfolio investors toinvest in another country could be

capital appreciation or the desire todiversify investments with respectto currency, country and industry.There may be a myriad of additionalreasons, but they all differ from thatof the direct investor.

In supplying capital to aforeign entity, a direct investor isinterested in establishing a lastingrelationship with that company.

The investment could be intended

to: provide them with access tonatural resources and to marketsfor products, gain access to laboursupply and to technology, ensuresecurity of supplies, or controlthe quality of a certain product orservice, for example. Although therate of return on the investmentmay not be of overriding concern,the direct investor may benefitfrom higher returns in conjunctionwith one or more of the previouslymentioned motives.

Direct investment in a foreigncountry is generally more difficultto liquidate quickly. FDI representsinvestments largely in wholly-owned and majority-ownedaffiliates with capital lockedinto fixed assets. By definition, FDIrefers to a long-term relationshipbetween the direct investor and theinvested enterprise in the foreigncountry.

Portfolio investments may beliquidated when there is a dropin confidence in the enterprise,currency, government or economy.Although short-term instrumentsare a significant componentof portfolio investments, suchinvestments can also includeequities and debt instruments,such as bonds and notes, which areconsidered long-term securities.Nevertheless, it is the tradablecharacteristic of these instrumentsthat gives portfolio investors theability to shift from one instrumentto another. Financial derivativesare of a short-term nature and

are hedged against such factors/...


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Table I.4 shows the fourI.22.standard components of theinvestment income categoryas recommended in BPM5:direct investments, portfolioinvestments, financial derivativesand other investments, forreceipts and payments ofinvestment income (see alsotable I.1). On the receipts side,earnings on the reserve assets areincluded with other investments.Within direct investments andportfolio investments, there aresubcomponents for income on

I.21. Reserve assets representthose external assets that are readilyavailable to and controlled by themonetary authorities to essentiallyredress BOP imbalances (i.e. directfinancing of payments imbalances)and to regulate indirectly themagnitude of such imbalancesthrough intervention in exchangemarkets to affect the currencyexchange rate. The reserves consistof monetary gold, Special DrawingRights (SDRs), the reserve positionin the IMF, foreign exchange andother claims (IMF, 1993, paragraph424).

Box I.4. FDI versus foreign portfolio investment and other investments(concluded)

as foreign exchange risk, interestrate risk, equity and commodityprice risk, and credit risk. Otherinvestments, like portfolioinvestments, can be considered aninvestment in financial instruments,such as trade credits, currency anddeposits, and bank loans.

Direct investment enterpriseshave access to the resources offoreign parent companies and theirinternational networks for capitalfinancing. They also take advantageof other sources of internationalfinancing, such as bonds, borrowingin foreign markets (portfolioinvestment) and loans from foreignbanks (other investment).

The direct investment enterprisescould also issue shares in smallparcels to non-resident shareholders,

which is considered foreign portfolioinvestment, as they are sufficientlydispersed to not have a voice in themanagement of the enterprises inwhich they invest. Trade credits andprepayments for exports grantedby non-residents are other formsof foreign finance. In addition,the direct investment enterprisemay have credit arrangements

with banks and other financialinstitutions in the host country.FDI is therefore an importantaggregate for all host countries tomeasure. However, it is importantto recognize that direct investmententerprises have access to otheravenues of financing domesticand foreign and for certain typesof analyses it is necessary to look atthe complete financing picture ofthese enterprises.

Source: Based on IMF, 1993, chapters XVIII and XIX.


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B. Accounting andrecording issues

1. Double-entry accounting

The BOP statement is basedI.23.on the double-entry accountingsystem, in which every transactionis recorded in two accounts.Double-entry bookkeeping alsomeans that there are both creditand debit entries. The total creditsmust equal the total debits for atransaction, which implies alsothat the sum of total credits mustequal the sum of total debits, thuskeeping the BOP in balance. Thenet balance of all entries in theBOP statement should be zero.

However, in practice, allI.24.the debits and credits do not netto zero. Information for the BOPitems comes independently fromdifferent sources, resulting ina balance which is a net creditor a net debit. A separate entryequal to that amount, with thesign reversed, is then used to

balance the BOP statement. Thisentry is referred to as net errorsand omissions, or the statisticaldiscrepancy(IMF, 1993, paragraph17).

Most of the entries recordedI.25.in the BOP are for transactionswhere economic values are

provided or received in exchangefor other economic values. These

equity and debt instruments. Directinvestment income is subdividedinto dividends and distributedbranch profits, reinvestedearnings and undistributedbranch profits, income on debt(interest) and interest income

(OECD, 1996, paragraph 28; IMF,1993, paragraphs 169-170).

Table I.4. Current account:standard components in the

investment income categoryReceipts

Direct investment

Income on equity

Reinvested earnings and


Portfolio investment

Income on equity (dividends)


Bonds and notesMoney market instruments

Financial derivatives

Other investment

Total investment income receipts

Payments

Direct investment

Income on equity

Reinvested earnings and

Income on debt (interest)Portfolio investment

Income on equity (dividends)


Bonds and notes

Money market instruments

Financial derivatives

Other investment

Total investment income payments

Source: Based on IMF, 2000: 22.


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outflows, or payments, and aredenoted as negative figures or

minuses. For current-accounttransactions, exports of goods andservices and income receivablesare shown as credit entries.Imports of goods and servicesand income paid out or payableare recorded as debit items.Hence, in the BOP presentationin table I.1, the receipts of goods

and services in the currentaccount are considered credits.(By convention the credit itemsnormally appearing in the currentaccount do not contain any signs,but the receipts are consideredpositive amounts, and thereforeassumed to take plus signs.)Similarly, imports of goods andother payments are consideredas outflows and thus assumedto take a minus sign (IMF, 1993,paragraph 19).

For the financial account, aI.27.debit is recorded for an increasein external financial assets anda decrease in external financial

liabilities. A credit is used to recorda decrease in external financialassets and an increase in externalfinancial liabilities. A debit, fora financial asset item such asBabylonian direct investmentabroad, represents an outflow ofcapital by the Babylonian directinvestor in order to increaseclaims on affiliates in other

values are for real resources,such as goods, services and

income, and financial claims. TheBOP double-entry system is basedon the practice of recording entriesfor a transaction at uniform valuesand in the same time period. To meetthis requirement, transactionsshould be entered at market value,and the time of recording shouldnormally take place when it is

deemed that a change of ownershiphas occurred. From a businesspoint of view, this changeof ownership would also beconsidered as the point at whichthe transaction, sale or purchase isrecorded in the accounting books.Much of the information for theBOP and FDI statistics is providedby enterprises, largely from theaccounting systems maintainedby businesses to producerecords disclosing the financialposition (balance sheet), resultsof operations (income statement)and changes in the financialposition (funds statement).

2. Debits and credits

The BOP accounting systemI.26.is much like the bookkeepingpractices of businesses: it toouses the terminology of debitsand credits. In the BOP recordingconvention, credits are regardedas inflows, or receipts, that are

denoted as positive figures orpluses. Debits are considered as


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countries. On the other hand,a debit for a financial liability

item, such as FDI in Babylonia,is an outflow of capital resultingin a reduction of investment bythe foreign parent company in aBabylonian subsidiary. Creditsare inflows of financial capital inthe financial account. For inwardFDI in Babylonia, a liability item,the credit represents an inflow of

capital to augment investment inthe direct investment enterprise.However, for the financialasset category, Babyloniandirect investment abroad, thecredit or inflow of financialcapital comprises a reduction ofinvestment in an affiliate by aBabylonian parent company (boxI.5).

3. Net recording

In the compilation of theI.28.BOP statement, transactions(debits and credits) are compiledon a gross or a net basis. In theBOP, much of the focus is on

the balance, whether it is themerchandise trade balance, thecurrent-account surplus or deficit,or the net capital movementfor the financial account. As aresult, the BOP compiler compilesthe best possible estimateswith an eye constantly on thebalances. Adjustments are made

to the compiled estimates soas to be congruent with other

measures and indicators, toreflect as accurately as possible

the economys interaction withthe rest of the world duringthe period. In principle, thecompetent application of BPM5and the complete compilation ofdebits and credits should resultin a net (conceptual) total of zero.However, as mentioned earlier,there is always a balance, which

reflects errors and omissions incompiling the BOP statement.Generally, the practice is to showerrors and omissions, or statisticaldiscrepancy, in the BOP statementas a separate item of equal valuebut with an opposite sign, toproduce a zero balance for thestatement (IMF, 1993, paragraph147).

Components of the currentI.29.account are normally shownon a gross credits and debitsbasis, such as total transportationreceipts or total travel payments.However, there is some netting inthe current account, largely in the

investment income category, aslosses accruing to direct investorsare netted against profits. Asa result, total current-accountreceipts and total current-accountpayments can be consideredas quasi-gross totals. It is thenetting of these two aggregatesthat produces the all-importantcurrent-account deficit or surplus.Transactions in the capital and


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Box I.5. Examples of FDI debits and credits

Transactions recorded in thefinancial account appear as creditsand debits with respective plus andminus signs, but conventionallyno sign is given. The followingfour examples illustrate the basicdifferences between credits anddebits for FDI financial assets andfinancial liabilities. It is shown howthese four examples of transactionsof Babylonian enterprises

would be reflected as debit andcredit entries in the financialaccount of Babylonias BOP.

The first two examples illustratethe financial liabilities of Babylonia,namely inward FDI in Babylonia.An increase in foreign investmentin Babylonia is recorded with acredit (+) entry while a decrease inforeign investment is entered with a

debit (-) entry. In the first example,ABC Incorporated, a United Statesparent company, increases its equityinvestment in ABC (Babylonia)Ltd., a wholly-owned subsidiary,by $10,000. The increase in foreigninvestment in Babylonia would berecorded as a credit or inflow in thefinancial liabilities of Babylonia, asfollows:

Foreign direct investment in BabyloniaEquity capitalLiabilities to direct investors +$10,000

The second example illustratesa reduction of FDI in Babylonia.ABC (Babylonia) Ltd. repays anintra-company loan of $15,000 to itsUnited States parent company. Thedecrease in inward FDI claims onthe Babylonian enterprise would be

registered as a debit or outflow inthe financial liabilities of Babylonia,as follows:

Foreign direct investment in BabyloniaOther capitalLiabilities to direct investors -$15,000

The next two examplesillustrate the financial assets ofBabylonia, or Babylonian directinvestment abroad. An increasein direct investment in othercountries is recorded as a debit (-)entry while a decrease in outward

FDI is recorded as a credit (+)entry. XYZ Ltd., a Babyloniantransnational corporation (TNC),has a subsidiary in Lebanon, XYZ(Lebanon) Ltd. The Babylonianparent company, or direct investor,reduces its investment in theLebanese subsidiary by redeeming$5,000 of shares in the company.The reduction in direct investmentabroad would be shown as a credit

or an inflow in the financial assetsof Babylonia, as follows:

Babylonia direct investment abroad

Equity capitalClaims on affiliated enterprises +$5,000

In the fourth example of debitsand credits for FDI, XYZ Ltd.,the Babylonian parent company,provides office equipment to its

wholly-owned subsidiary, XYZ(Lebanon) Ltd. resulting in anincrease in intra-company tradereceivables of $20,000 from theLebanese affiliate. The increasein investment abroad is shown asa debit or an outflow of financialcapital in the financial assets ofBabylonia, as follows:

Babylonia direct investment abroad

Other capitalClaims on affiliated enterprises -$20,000


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direct investment), changes inclaims on direct investors are to

be included in the equity capitalor other capital components for agiven period. The subsidiary mayown shares in the foreign parentor other affiliated companies,and may have extended loans tothose entities. In these situations,the changes in these claim itemsare combined (or netted) withthe corresponding items onliabilities to direct investors(liability transactions with thedirect investor) in the equityand other capital categoriesduring the period (box I.6). Inthe same manner, with regardto direct investment abroad, the

transactions for liability claimsare to be included and nettedwith the respective transactionsof claims on affiliated enterprisesfor the equity capital and othercapital components (for a detailedanalysis of each component, seebox I.7). The FDI statistics shouldclearly distinguish between

claims on and liabilities to thedirect investor (inward directinvestment) and between claimson and liabilities to affiliatedenterprises (outward directinvestment).

For the compilation of stockI.31.positions in the IIP, asset and

liability positions are netted for thedirect investment equity capital

financial account are recorded ona net basis with all the credit and

debit entries being netted together.As a result, the net financialmovement may not provide muchindication of the kind of activitythat took place during a givenperiod for a particular financialaccount item. It should be notedthat gross figures provide a muchbetter basis for an analysis of

changes in the net balances. Therecording of current-accounttransactions, in principle, shouldbe on a gross basis (IMF, 1993,paragraph 193), while entries inthe financial account should, inprinciple, be recorded on a netbasis (IMF, 1993, paragraph 511).

Under BOP and FDII.30.statistics, there is a combiningor netting of changes in claimson and liabilities to the directinvestor of FDI in the reportingeconomy, or changes in claimson and liabilities to affiliatedenterprises in the direct investmentabroad category. Once a directinvestment relationship has beendetermined to exist, it is ascribedon a directional basis, as inwarddirect investment in the compilingeconomy (financial liability) oroutward direct investment abroad(financial asset), as the case maybe (IMF, 1993, paragraph 330).

For example, as shown in boxI.6, for the liability item (inward


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asset position could arise foran investing enterprise because

unusually large debt liabilities toforeign affiliates more than offsetthe equity capital and other capitalclaims on the foreign affiliates bythe direct investor.

4. Time of recording andvaluation

Both sides of aI.32.transaction should be recordedsimultaneously due to the uniformbasis of valuation. With respect tointernational assets and liabilities,items are considered as transactedwhen they are entered in theaccounting records of the parties

and other capital components.For example, for the asset item on

direct investment abroad, liabilitypositions are included within theequity capital, reinvested earningsand other capital components.For the equity capital component,the shares (liabilities) owned byforeign affiliates in the directinvestors are netted with thevalue of the shares (assets) owned

by the direct investors in theforeign affiliates. In the othercapital component, debt liabilitiesto the foreign affiliates are offsetagainst the receivables of debtfrom the affiliates. It is possible,though infrequent, that a negative

Box I.6. Netting of assets and liabilities

The category, Babylonian directinvestment abroad, is a financialasset item that covers the financialtransactions of Babylonian directinvestors with the enterprises inforeign countries in which theyhave invested. Box table I.7.1(see next box) contains quarterlyinward and outward FDI estimates

for Babylonia for the first andsecond calendar quarters of 2005.There are two subcomponents ofequity capital: (i) claims on affiliatedenterprises, which are asset claimscomprising the equity investmentof direct investors in their foreignaffiliates (i.e. subsidiaries andassociates); and (ii) liabilities toaffiliated enterprises, which representthe ownership of shares of the directinvestors by their foreign affiliates

abroad. On analysing the firstquarter of 2005, it can be establishedthat the equity capital transactionsfor Babylonian outward FDI showa net outflow of $55,000. This netincrease in investment in equitywas brought about by a net outflowof $50,000 as Babylonian directinvestors increased their holdings

of shares in their foreign affiliates.There was also a net outflow of$5,000, as foreign affiliates reducedtheir holdings of shares in theirBabylonian parent companies inthe first quarter. Both equity capitalcomponents recorded net outflows,one to produce larger external assetclaims and the second to producea reduction in liability claims by

non-residents.


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VOLUME I | 25

of equity capital, debt capital andreinvested earnings generated bythe enterprises in which they hadinvested. In the second quarter,Babylonian direct investorsincreased their investments in theshares of their foreign affiliates by$40,000. Some Babylonian parentcompanies acquired more shares,while others decreased their

holdings of shares, to produce anoutflow of $40,000. Babylonianforeign affiliates acquired moreshares of their Babylonian parent

The following is an analysisand explanation of the FDIcapital movements made duringthe second quarter of 2005. Inthe financial asset category ofBabylonian direct investmentabroad, a net outflow of $80,000was transacted during the secondquarter. This represents an increaseof 23 per cent over the net outflow

in the previous quarter. Overall,Babylonian direct investors wereinvesting more financial capital intheir foreign affiliates, in the form

Box table I.7.1. Financial account of Babylonia: direct investment,by type of capital, quarterly and annual

(Thousands of dollars)

Item2005/Q1 2005/Q2 2005/Q3 2005/Q4

Financial assetsBabylonian direct investment abroad

Equity capital -55 -35 -50 -40enterprisesLiabilities to -5 5

Reinvested earnings -20 -15Other capitala 10 -30

-10 -20enterprisesLiabilities to 20 -10

-65 -80

Financial liabilitiesForeign direct investment in Babylonia

Equity capital 40 65Claims on direct -5 -10investorsLiabilities to 45 75direct investors

Reinvested earnings 15 20Other capitala 35 25

Claims on direct 5 -15investorsLiabilities to 30 40direct investors

90 110

a Includes intra-company loans (both long and short term), bonds and moneymarket instruments, trade credits and financial leases between affiliated firms.

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companies, which generatedan inflow of $5,000. Taking intoconsideration the two previousequity components, the netmovement of equity capital betweenBabylonian direct investors and thedirect investment enterprises inwhich they had invested resultedin a net outflow of $35,000.

With respect to other capital

(comprising largely long-termand short-term debt), there wasa net outflow of $30,000, as directinvestors invested more in theiraffiliates in the second quarter. Thenet outflow of other capital wasdue to Babylonian direct investorsproviding additional loans of$20,000, while at the same timethey made a repayment of $10,000

of debt owing to their foreignaffiliates. During this quarter,Babylonian investors reinvested$15,000 of the earnings generatedby the enterprises in which theyhad direct investments.

In the financial liability categoryof FDI in Babylonia, a net inflowof $110,000 was transacted duringthe second quarter of 2005. Foreigndirect investors increased theirinvestments in equity capital by$65,000, in other capital by $25,000and in reinvested earnings by$20,000. Foreign investors invested$75,000 in more shares in their

Babylonian affiliates. This amountwas offset by an outflow of $10,000as FDI enterprises in Babyloniaincreased their holdings of sharesin their foreign parent companies.Direct investors reinvested anamount of $20,000 of the quarterlynet income of their Babylonianaffiliates. There was a net inflowof $25,000 of other capital asforeign investors provided more

loans ($40,000) to their Babylonianaffiliates, while these same affiliatesmade additional loans to theirforeign parent companies, resultingin an outflow of $15,000.

to the transaction (paragraphrecording should be done

when there is a legal changeof ownership. However, forenterprises, financial items areconsidered as transacted whenthey are entered in the accountingrecords of the parties to thetransaction (paragraph I-25).For example, a loan involves acreditor and a debtor. When acreditor provides the funds forthe loan, a financial claim on thedebtor is recorded in the books

of the creditor. When the debtorreceives the funds, a financial

liability is recorded in theaccounting records of the debtorthat corresponds to the increasein resources in the assets.

TheI.33. BPM5 of the IMFand the Benchmark Definition ofForeign Direct Investment, thirdedition (BD3), produced by theOrganisation for Economic Co-

operation and Development(OECD), and their subsequent


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VOLUME I | 27

sheet values are often the onlysource of valuation for inward

direct investment positions,and they are readily available inmost countries. With respect toaccounting for international assetsand liabilities, it is acceptable fordirect investment stock estimatesto be compiled at book values.(See box I.9 for a case study thatcompares market prices and bookvalues for Sweden).

Countries that haveI.35.relatively little experience incompiling direct investmentstatistics could devote their effortsmainly to compiling book valuesfor FDI stocks. Given possibleconstraints in terms of limitedmanpower, resources and time,

it may be inappropriate for thesecountries to devote too much effortto compiling FDI stocks at marketvalues. Instead, they may wishto concentrate their initial effortson compiling and improving thebook values of FDI stocks andthen proceed to compile them inmarket value terms.

Besides the overridingI.36.reason of readily available data,there are a number of otherreasons for supporting the practiceof compiling FDI stocks at bookvalues. First, direct investmentinflows for a particular year,whether in the form of cash orgoods, are at current values, and

these are the values reflectedin the balance sheet of the

updates, recommend that, forthe BOP and IIP, market price be

used as the basis for valuation(IMF, 1993, paragraph 91; OECD,1996, paragraph 20; OECD, 2008,paragraph 39) not only of directinvestment, but also for thecompilation of all items relatingto flow transactions and stockdata. Generally, the applicationof the market price concept for

financial transactions or flows ofdirect investment does not pose aproblem. Movements of financialcapital are valued at currentvalues or market values, as thetransactions are valued at theactual price agreed upon by thetransactors. Particular care maybe needed to ensure that proper

market values are compiled forsome types of transactions, such astransfer pricing, share exchangesand mergers and acquisitions(M&As).

I.34. There is, however, a need toelaborate on the valuation of directinvestment stock positions (seebox I.8 for the case of the United

States). The BPM5 states that inprinciple, all assets and liabilitystocks comprising a countrys IIPshould be measured at marketprices (IMF, 1993, paragraph107). However, in practice, bookvalues from the balance sheets ofenterprises (or investors) are oftenused to determine the value of the

stock of direct investment. That isbecause the enterprises balance


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The July 2002 issue of the Surveyof Current Business published by theUnited States Bureau of EconomicAnalysis (BEA) contains the IIP ofthe United States at year-end 2001and the direct investment positionsfor 2001. The direct investmentstocks in the IIP include data onassets and liabilities valued atcurrent cost and market value.

The valuation on a current-costbasis uses current prices and priceindices to arrive at the current costfor outward direct investment (i.e.United States parent companiesshare of their foreign affiliatesinvestments in plants andequipment, land and inventories).

In the same manner, for inwarddirect investment, the foreign directinvestors share of their UnitedStates affiliates investments inplants and equipment, land andinventories are also computed atcurrent cost. The market valuationbasis is more straightforward inthat it uses indices of stock marketprices to value the owners equity

shares of direct investment.The BEA continues to present

the IIP estimates on both a current-cost and market-value basis, and noton a historical-cost basis. It shouldbe emphasized that all categories inthe IIP accounts can be estimated

readily with observable marketprices, except for direct investments.In outlining the problems relatingto direct investments, the BEAstates that direct investmentpositions typically involve illiquidownership interests in companiesthat may possess many uniqueattributes such as customer base,management, and ownership ofintangible assets whose valuesin the current period are difficultto determine, because there isno widely accepted standardfor revaluing company financialstatements at historical cost intoprices of the current period (UnitedStates, Department of Commerce,2002). The BEA continues to utilizethe current-cost method because itis compatible with other economicaggregates, particularly with theFederal Reserve Boards estimatesof domestic net worth.

Details of direct investmentpositions also appear at historicalcost in a separate article in the July2002 issue. Only the historical-

cost positions are presented withcountry and industry detail. UnitedStates direct investment abroadand FDI in the United States atcurrent cost and market value areprepared at an aggregate level onlyfor comparison purposes.

Box I.8. FDI stock

Documents

2009 - Fdi Manual - Unctad