Direct Investment Measuring Flows and Positions Course on Balance of Payments and

1. Direct Investment Measuring Flows and Positions Course on Balance of Payments and International Investment Position Manual (BPM6) IMF-PFTAC Nadi November 22-December 1, 2010 BP10

2. Introduction • Overview of direct investment classifications • Direct investment standard components • Coverage (what’s in/out) • Type of direct investment & direction • Some other issues • Changes from BPM5 • Compiling Direct Investment in BOP/IIP (next session)

3. Classifications used in Direct Investment • Equity and investment fund shares • Equity excl. reinvestment of earnings) in financial • reinvestment of earnings ) account • Debt • Within each of equity and debt • Direct investor in direct investment enterprise • Reverse investment • Between fellow enterprises, the latter is split between whether ultimate parent is resident, non-resident or unknown

7. Coverage (what’s in/out) • Direct investment covers most financial transactions and positions between affiliates resident in different economies • Investment income associated with direct investment positions is also included in direct investment • There are exceptions

8. Coverage (what’s in/out) Cont. • Intercompany lending • Transactions - financial and insurance corporations • Other financial instruments • Financial derivatives & employee stock options, Investment funds, Real estate & International organisations • Pass-through funds • Domestic relationships • Start & end of direct investment relationship

9. Coverage : Intercompany lending • Intercompany lending • Included in direct investment debt positions and flows between affiliated enterprises • Except those through selected affiliated financial corporations • To facilitate comparability with national accounts and financial statistics, it may be desirable publish intercompany lending by type of instrument and maturity • Transactions between affiliates in financial assets issued by an unrelated third party are not direct investment transactions

10. Coverage : Intercompany lendingCont. • Debt between selected affiliated financial corporations is excluded because it is not strongly connected to direct investment relationship • Financial corporations include • Deposit-taking corporations • Investment funds • Other financial intermediaries, except insurance corporations and pension funds

11. Coverage: Intercompany lendingCont. • Instruments that may be included intercompany debt between enterprises in a direct investment relationship are those financial instruments other than • Monetary gold • SDRs • Currency bank positions • Pension and related entitlements

12. Coverage: Intercompany lending Cont. • Insurance technical reserves are included in direct investment when the parties are in a direct investment relationship. For example • Reserves may arise from reinsurance contracts between affiliated insurance corporations • Captive direct insurance. • A captive insurance company writes insurance policies largely or entirely with its owners and other affiliates

13. Coverage: Fin. derivatives & employee stock options • Financial derivatives and employee stock options are excluded from direct investment and included in the functional category financial derivatives (other than reserves) and employee stock options

14. Coverage : Investment funds • Investment funds may be DIs or DIEs • A “fund of funds” is an investment fund that invests in other investment funds, so may become a direct investor in one of the funds • In a master-feeder fund arrangement, one or more investment funds (feeder funds) pool their portfolio in another fund (the master fund). In this case, a feeder fund that has ten percent or more of the voting power in the master fund, would meet the FDIR definition of a direct investor • Retail funds that hold ten percent or more of voting power in an enterprise are direct investors

15. Coverage: Real estate • Direct investment may include real estate investment, including investment properties and vacation homes • Branches or notional units are identified when nonresidents own real estate and other natural resource • If real estate investment is significant, compilers may wish to publish data on such investment separately on a supplementary basis

16. Coverage: International organisations • Equity in international organizations is excluded from direct investment, even where voting power is 10 percent or more • Equity contributions are included in portfolio investment (if in the form of securities) or other investment—equity (if not in the form of securities). • Equity in international organizations would not generally qualify as reserve assets because of lack of ‘ready availability’

17. Pass-through funds • “Pass-through funds” or “funds in transit” are funds that pass through an enterprise resident in an economy to an affiliate in another economy, so that the funds do not stay in the economy of that enterprise • These funds are often associated with direct investment, but have little impact on the economy they pass through • Pass-through funds are included in direct investment

18. Domestic links and direct investment • FDIR does not exclude ownership links between enterprises resident in the same economy

19. Start & end of direct invest relationship • The whole of the transaction that reaches or surpasses the threshold of 10 percent or more of voting power is included under direct investment • Any transactions prior to that point are not generally classified as portfolio investment (with the exception of reverse investment)

20. Type of direct investment • The standard components recognise • investment by a direct investor in its direct investment enterprise (whether in an immediate relationship or not) • reverse investment by a direct investment enterprise in its own immediate or indirect direct investor • investment between resident and nonresident fellow enterprises

21. Type of direct investment: Reverse investment • A direct investment enterprise lends funds to or acquires equity in its immediate or indirect direct investor, • provided it does not own equity comprising 10 percent or more of the voting power in that direct investor • If two enterprises each have 10 percent or more of the voting power in the other • Not reverse investment • Mutual direct investment

22. Presentation using directional principle • The directional principle • is a presentation of direct investment data organized according to the direction of the direct investment relationship • It can be contrasted with the asset/liability • Arising from differences in the treatment of • reverse investment • some investment between fellow enterprises • Can be applied to the IIP, financial account, and investment income

23. Presentation using directional principle Cont. • Direct investment abroad, or outward investment, covers assets and liabilities between • Resident DIs and their DIEs • Resident and nonresident fellow enterprises if the ultimate controlling parent is resident • Direct investment in the reporting economy, or inward direct investment, includes all liabilities and assets between • Resident DIEs and their DIs • Resident and nonresident fellow enterprises if the ultimate controlling parent is nonresident

24. Presentation using directional principle Cont. • If residence of the ultimate controlling parent is unknown • Assets are treated as direct investment abroad • Liabilities are treated as direct investment in the reporting economy

25. Analytical use of different presentations • Data on both the asset/liability and directional principle bases of compilation are useful for different kinds of analysis

26. Other issues with direct investment • Reinvestment of earnings may be negative • Direct investment flows in kind • Mergers and acquisitions • Corporate inversion and other restructuring • Superdividends • Borrowing for fiscal purposes

27. Other issues with direct investment Cont. • Round tripping • Relationships other than direct investment • Presenting additional detail • Financial instrument, maturity, currency and sector • Further issues • Measurement of activities of DIEs

28. Changes to BPM5 • The exclusion of debt positions between affiliated financial corporations is defined • The distinction between permanent and non permanent debt dropped • The concept of pass-through funds is introduced • Direct investment is broken down into • investment by a DI in its DIE • reverse investment • between fellow enterprises (added in BPM6)

29. Changes to BPM5 Cont. • The main presentation uses direct investment assets and direct investment liabilities (so that, for example, the netting of reverse investment is not built in). However, data on the basis of the directional principle are explained • The treatment of fellow enterprises in data on a directional basis is explained, with both a preferred and practical alternative suggested • Data on a directional principle basis and the details needed to compile these data are shown as supplementary items in Appendix 9