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by Ayse Bertrand Manager, International Investment Statistic Investment Division,

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

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by Ayse Bertrand Manager, International Investment Statistic Investment Division,

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

  2. OECD Benchmark Definition • Prepared under the auspices of the OECD Investment Committee • Technical work conducted by the OECD experts of the Workshop of International Investment Statistics (of the Investment Committee) • First issued in 1983 and revised twice • Fourth edition – forthcoming in 2008 • Prepared in close co-operation with OECD Member countries, IMF, and other international institutions

  3. Objectives of Benchmark Definition • To provide • a single point of reference for FDI statistics; • clear guidance for individual countries • international standards considering the effects of globalisation; • the basis for a comparable international economic analysis • an objective basis to identify methodological differences across countries • practical guidance to users of FDI statistics • FDI as measures of globalisation

  4. What do we want to measure? • Dichotomy of FDI: • Part of Balance of Payments statistics/ financial account • FDI statistics –(also a leading globalisation indicator) • New challenges developing meaningful presentations of FDI • excluding transactions through Special Purpose Entities (SPEs) • FDI by type (M&As, greenfields, extension of capital, financial restructuring) • FDI according to ultimate investing/ultimate host country • Research agenda

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

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

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

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

  9. FDIR • Classification as FDI • two institutional units resident in different economies and • in a FDI relationship. • FDIR (successor of FCS) is the method to identify and to determine the extent and type of DI relationships. • FDIR is based on equity investment only. • FDIR allows compilers to determine the population of direct investors and direct investment enterprises to be included in FDI statistics. (see also OECD HEGI)

  10. FDIR • Foreign direct investment reflects the objective of establishing a lasting interest by a resident enterprise in one economy (direct investor) in an enterprise resident in an economy other than that of the investor (direct investment enterprise). • The lasting interest = • LT relationship between the direct investor and the direct investment enterprise and • a significant degree of influence on the management of the enterprise. • The ownership of 10 % or more of the voting power of a resident enterprise by a non-resident investor in a resident enterprise is the evidence of such a relationship.

  11. FDIR • Aforeign direct investor is an entity (an institutional unit) that has acquired at least 10% of the voting power of a corporation, or equivalent for an unincorporated enterprise, resident in an economy other than its own. A direct investor could be from any sector of the economy and could be any of the following: • an individual; • a group of related individuals; • an incorporated or unincorporated enterprise; • a public or private enterprise; • a group of related enterprises; • a government; • an estate, trust or other societal organisation; or • any combination thereof. • In the case where two enterprises each own 10% or more of each other’s voting power, each is a direct investor in the other.

  12. FDIR • Basic types of affiliates: • A controlled affiliate is an enterprise in which the investor has control of more than 50% of the voting power. • A non-controlled affiliate is an enterprise in which the investor has control of at least 10% of the voting power and no more than 50%.

  13. FDIR: Principles for extending the relationship through indirect ownership • A series of controlled affiliates can continue as long as control exists at each stage in the ownership chain

  14. FDIR: Principles for extending the relationship through indirect ownership: • Any controlled affiliate can extend the relationship to a non-controlled affiliate by owning from 10% to 50% of the voting power of that enterprise

  15. FDIR: Principles for extending the relationship through indirect ownership: • A non-controlled affiliate can extend the relationship only to another non-controlled affiliate by owning more than 50% of the voting power of that enterprise. • Such a chain of non-controlled affiliates can be extended as long as majority ownership of voting power exists at each stage.

  16. FDIR: Basis for extending the relationship through joint ownership • investor and its controlled affiliates combined own +50% of the voting power of an enterprise, the owned enterprise is a controlled affiliate of the investor. • investor and its controlled affiliates combined own 10% - 50% of the voting power of an enterprise , the owned enterprise is a non-controlled affiliate of the investor.

  17. Valuation of equity • Market value = basic principle • Listed equity: Listing in an organised market provides a good basis for valuing listed equity • Unlisted equity(6 methods to estimate market value) • Recent transaction price • Market capitalisation method • Net asset value (NAV) • Including goodwill and intangibles • Excluding goodwill and intangibles • Present value • Own funds at book value (OFBV) • Apportioning global value

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

  19. Aggregate FDI statistics [BPM6 & BMD4 ]Exhibit 1. FDI Transactions According to Asset/Liability Principle

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

  21. Comparison of two techniques • Directional principle: • The asset position is greater than the outward position and the difference is equal to: • (A1+A2+A3+A4+A5+A6) – (A1-L3+A5+A2-L4+A6) = A3+L3+A4+L4 • The liability position is greater than the inward position and the difference is equal to: • (L1+L2+L3+L4+L5+L6) – (L1–A3+L5+L2–A4+L6) = A3+L3+A4+L4

  22. Genuine FDI • FDI according to immediate counterparty Problems: - Inflation of FDI - Analytical interpretation of origin/destination country origin/destination industry origin/destination of country/industry • FDI excluding funds passing through • SPEs – according to national definition and as a part of DP • (a typology of SPEs : under development in co-ordination with SNA • Operating affiliates [Research agenda]

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

  24. Exhibit 3. Components of M&A transactionsconceptual framework by country allocation and by industry classification

  25. Examples of transactions

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

  27. Ultimate investing/host country • More Complex Example of Ultimate Investing Country Country C1 Country C3 Country C5 Enterprise E1 Enterprise E3 Enterprise E5 | | | 60% 20% 80% | | | Country C2 Country C4 Country C6 Enterprise E2 Enterprise E4 Enterprise E6 | | | 70% 20% 10% | | | ______________________________________________ | Country C7 | | Enterprise E7 |

  28. THANK YOU FOR YOUR ATTENTION

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