Foreign direct investment (FDI) is a key driver of international economic integration. With the right policy framework, FDI can provide financial stability, promote economic development and enhance the well being of societies.

Financial markets have evolved into a more globally integrated framework as a result of increasing liberalisation of exchange controls and market access. This integration, accelerated by increasing competition amongst market participants, has led to the introduction of new financial instruments with broad market access and lower transaction costs, attracting investors of many nationalities and countries (economies).1 The expansion of cross-border financial flows has been further accelerated by technological innovations in communications and data processing.

This edition of the Benchmark Definition includes for the first time a chapter devoted to the uses of foreign direct investment (FDI) statistics to assist users in their analysis of both the global and/or regional nature of FDI activity and the industry sectors that FDI affects. As economies become increasingly global, statistical methodologies need to be adapted to new realities, thereby maintaining the analytical quality of the statistics. Keeping in mind the complex nature of multinational enterprise (MNE) and hence FDI structures, this chapter on the uses of FDI statistics should prove valuable for a wide range of users.

This chapter provides an overview of statistical units and the Framework for Direct Investment Relationships (FDIR). Rigorous application of these fundamental aspects is central to the implementation of the Foreign Direct Investment (FDI) concepts and recommendations described in this Benchmark Definition. It is also important both for the interpretation and use of FDI statistics. Definitions of statistical units which underpin the concepts and treatment of FDI are in line with the general principles adopted in the System of National Accounts (SNA) and the Balance of Payments Manual (BPM) and, therefore, consistent with the concepts and definitions underlying most macro-economic statistics.

This chapter describes the components, accounts and scope of foreign direct investment (FDI).

This edition of the Benchmark Definition maintains the recommendation of the previous edition that market value is the conceptually ideal basis for valuing direct investment transactions and positions. The use of market prices is the only basis under which all parties can calculate their assets and liabilities consistently. In addition to outlining some of the main accounting principles, this chapter also provides guidance on the calculation of FDI at market value. While this might be relatively straightforward for equity transactions and positions involving companies where the equity securities are listed on an organised stock exchange, it is much less so for unlisted (or unquoted) shares. In this latter case market value may have to be estimated from the data provided by these unlisted companies. This chapter lists a number of recommended methods by which this can be achieved, as well as listing those methods that are not recommended. This chapter also discusses the valuation of debt where it recommends the use of the nominal value of the debt as the proxy to market value. Finally the valuation of transactions where transfer pricing is operating is discussed.

There are a number of special cases where it may be unclear whether or why a particular type of enterprise or activity qualifies for treatment as a direct investment enterprise or direct investment. Several of these cases are discussed below. These are Special Purpose Entities (SPEs); collective investment institutions (CIIs); land, structures and other immovable objects; construction enterprises; mobile equipment; and insurance companies.

The classification of investment by partner country and by industry sector are the two major dimensions required in presenting more detailed analyses of foreign direct investment (FDI) statistics under the directional principle. These detailed directional data are complementary with the FDI assets and liabilities aggregates also recommended by this Benchmark Definition and published as a part of the balance of payments and international investment position statistics. This chapter describes the recommended methodology for presenting these detailed breakdowns of direct investment statistics by partner country and industry sector under the directional principle.

The statistical indicators on foreign direct investment (FDI) that are at the core of this benchmark definition relate to transactions and positions between direct investors and their direct investment enterprises, rather than to the overall financing and operations of those enterprises. For example, the direct investment position measures the equity and debt financing provided by direct investors and excludes any such financing that may have been provided by other owners or lenders. Similarly, direct investment income includes the direct investors’ shares in the earnings and the interest payments of direct investment enterprises, but it excludes the shares of others. Measures of inputs used and output produced by direct investment enterprises, such as employment and value added, fall outside the scope of FDI statistics.

This revision of the third edition of the Benchmark Definition started in 2004.55 However, it was not possible to finalise all the research in time for publication of the fourth edition in 2008. One of the main novel features of the Benchmark Definition is the introduction of a research agenda which includes work to be conducted after the publication of the present edition. Results of that work will be published as an addendum to the fourth edition as soon as it is completed.

The Benchmark Definition recommends two types of standard presentations for the dissemination of foreign direct investment (FDI) statistics, one according to the assets/ liabilities principle, and the other according to the directional principle . In addition, further analyses of direct investment are to be reported on a supplemental (voluntary) basis but their reporting is strongly encouraged. Overall, the presentations for direct investment statistics recommended by this Benchmark Definition can be summarised as follows:

Financial corporations such as Special Purpose Entities (SPEs) or conduits that raise funds in open markets on behalf of their parent corporation or fellow enterprises are usually encompassed in the SNA definition of “Other financial corporations”. Therefore, non-equity transactions/positions between these financial corporations should be included in FDI. A more detailed discussion of the SPEs and related issues may be found in Annex 7.

This annex presents the Framework for Direct Investment Relationships (FDIR) the preferred method for identifying the extent and type of direct investment relationships. It also provides information on two alternatives to the FDIR – the Participation Multiplication Method (PMM) and the Direct Influence/Indirect Control Method (DIIC). The methods are compared in terms of inclusions and exclusions from direct investment. Practical implementation of the FDIR for measuring investment income and classifying financial transactions and positions is also discussed.

The underlying principle for the valuation of equity is the market value of that equity. Listing in an organised market provides a good basis for valuing listed equity. However it can be more difficult to determine a market value for unlisted equity and illiquid listed equity. In any case, if there has been a material change in an enterprise’s financial position since the date to which the valuation applies (but before the reference date), an adjustment may need to be made. Examples of such material events include an unexpected decision in a lawsuit, credit downgrade or upgrade, major new invention or mineral find, or bankruptcy.

In a relationship between a direct investor and a direct investment enterprise (DIE), the net current earnings of a DIE that are not distributed as dividends to the shareholders (or the equivalent in the case of quasi-corporate enterprises) are deemed distributed, as investment income, to the direct investor (DI), proportionate to its (their) holdings of shares (or equivalent) in the DIE.68 As this is an imputed transaction, a counterpart imputation (of equal value but opposite direction) is required in the financial account representing the reinvestment of the funds back into the DIE. The income imputation is referred to as reinvested earnings (RE) (Box A.6.1), while the financial account entry is referred to as reinvestment of earnings income, to differentiate it from the income transaction.

The purpose of this Annex is to assist compilers to identify Special Purpose Entities (SPE). The core business of SPEs is to channel funds between entities outside the country where they are established. The identification of SPEs allows foreign direct investment (FDI) compilers to segregate transactions and positions that hardly affect domestic economic activity and do not reflect genuine investment activities in or of the reporting country itself. The role of these SPEs is merely to serve as a financial turn table for enterprises in other countries.

The term collective investment institution (CII) generally refers to incorporated investment companies and investment trusts, as well as unincorporated undertakings (such as mutual funds or unit trusts), that invest in financial assets (mainly marketable securities and bank deposits) and/or non-financial assets using the funds collected from investors by means of issuing shares/units (other than equity). Other terms referring to CIIs may also be used, e.g. collective investment scheme, collective investment vehicle, collective investment undertaking, and in certain cases, investment fund. The CII can be open-ended or closed-ended. If open-ended, there is no limit to the number of shares/units on issue and the shares/units can be, at the request of the holders, repurchased or redeemed directly or indirectly out of the undertaking’s assets. If closed-ended, the number of shares/units on issue is fixed and investors entering or leaving the fund must buy or sell existing shares. The shares/units can be quoted or unquoted. The CII may pay periodic dividends, capitalise the income or a combination of those approaches, depending on the terms set out in its prospectus.

Analysis of Foreign Direct Investment (FDI) is important due to its impact on the production, employment, value added, etc., of the host economy. Distinguishing FDI by its type will help to refine this analysis as the purchase/sale of existing shares versus purchase/sale of newly issued shares will usually have significantly different results regarding their economic impact (see Chapter 2). The focus of this annex concerns practical recommendations on the compilation of FDI statistics to show investment in the form of Mergers and Acquisitions (M&A) type transactions, and, more specifically, purchase/sale of existing shares.

Standards in this Benchmark Definition recommend allocating Foreign Direct Investment (FDI) transactions and positions by partner country and by industry for data presented on a directional basis (see Chapter 4 for an explanation of FDI presented on a directional basis). Hence, these items are attributed to the country of the immediate counterparty and the industry of the immediate counterparty for outward FDI.

Currency Unions (CUs) and Economic Unions (EcUn) play an increasingly important role in the world’s economy. This Annex summarises the specific features of the compilation and uses of CUs/EcUns’ Foreign Direct Investment (FDI) statistics.

This annex discusses some examples of the foundations needed to compile foreign direct investment (FDI) data via a survey system. These include data sources, survey design, need for a Business Register, mail-out procedures, data capture, compilation and dissemination practices, legal aspects, timeliness and revision practices.

At the time of publishing this edition of the Benchmark Definition, there were a number of issues requiring further investigation. These issues have been placed on a research agenda with investigations to be undertaken to progress their resolution (to the extent possible). As results become available from these investigations, they will be released in a managed process as addenda to the Benchmark Definition. The appearance of an issue on the research agenda does not guarantee that recommendations in the Benchmark Definition will change as a result of further investigation. Consequently, compilers should not presume the results of any investigations on the research agenda, but should await the publication of an addendum on the outcomes. The topics to be investigated are first categorised under the following five headings.