Which of the following terms refers to the total accumulation of inbound FDI in a country or outbound FDI from a country?

(Main definitions and concepts derived from either IMF BPM6 or OECD BD4 Manuals )

Direct Investment arises when an investor resident in one economy makes an investment that gives control or a significant degree of influence on the management of an enterprise that is resident in another economy. Direct Investment is one of the five main functional categories of investment used in international accounts to classify financial transactions, positions and primary income. Therefore, this category encompasses all kind of cross-border investment made by an entity resident in one economy (direct investor) to acquire a lasting interest in an enterprise operating in another economy (direct investment enterprise). In practise, the lasting interest is deemed to exist through either immediate or indirect relationships. Once a direct investment relationship is established, most flows and positions between the entities, including loans and trade credit, are classified as direct investment. The only financial flows and positions excluded from FDI statistics are:

• Debt between selected affiliated financial corporations.
• Financial derivatives.

Immediate direct investment relationship arises when a direct investor directly owns at least 10% of the voting power in a direct investment enterprise.

Indirect direct investment relationships arise when a direct investor indirectly owns a direct investment enterprise either through a chain of control (i.e. ownership > 50% at each stage), or a chain of control ending with an influence of at least 10% of the voting power of the direct investment enterprise. Said differently, an affiliate of a subsidiary (see definitions below) is considered to be in a direct investment relationship with the direct investor whilst an affiliate of an affiliate is not considered as being a direct investment relationship.

A direct investor is an entity or group of related entities that is able to exercise control or a significant degree of influence over another entity that is resident of a different economy. A direct investor can be an individual, a group of related individuals, an enterprise (incorporated or unincorporated, private or public), a group of related enterprises, a government body, an estate, trust or other societal organisations, or any of the combination above.

A direct investment enterprise is an entity subject to control or a significant degree of influence by a direct investor.  A direct investment enterprise may be an incorporated enterprise (subsidiary or associate) or an unincorporated enterprise (branch).

 A subsidiary is a direct investment enterprise over which the direct investor is able to exercise control (ownership > 50%).

An associate is a direct investment enterprise over which the direct investor is able to exercise a significant degree of influence (ownership > 10%) but not control (ownership ≤ 50%).

Fellow enterprises are enterprises which do not have enough (any) voting power in each other to establish a significant degree of influence but have a common parent. An enterprise is a fellow enterprise of another if the two enterprises have the same immediate or indirect direct investor, but neither is an immediate or indirect direct investor in the other.

The Framework for direct investment relationships (FDIR) reflects the general approach (suggested by international guidelines) for identifying and determining the direct investment relationships and, therefore, allows compilers to determine the population of direct investor and direct investment enterprises to be included in their FDI statistics.

Affiliates of an enterprise consist of its immediate or indirect direct investor(s), its immediate or indirect direct investment enterprise(s) (subsidiaries, associates, subsidiaries of associates) and its fellow enterprise(s).

Reverse investment arises when a direct investment enterprise acquires equity in its immediate or indirect direct investor provided that it does not own more that 10% of the voting power in the direct investor (otherwise the direct investment enterprise will also become a direct investor), or when a direct investment enterprise lends funds to its immediate or indirect direct investor. Under the directional principle presentation (see below), a reverse investment relates to either a liability under direct investment abroad or an asset under direct investment in the reporting economy, thus always seen as a withdrawal of the FDI capital initially invested by the direct investor in its direct investment enterprise.

(Two different presentations of FDI statistics:  asset / liability versus directional principle)

As a reminder, direct investment statistics embody three distinct statistical accounts, namely FDI positions recorded in the international investment positions (i.i.p) statements, FDI flows recorded in the financial section of the Balance of Payments accounts, and FDI income being part of the primary income of the Balance of Payments accounts. Direct investment flows and positions data can be presented either according to the asset/liability or directional principle.

Asset/liability principle: Allocates the BOP/IIP data according to whether the investment relates to an asset or a liability. This is the official standard presentation recommended by the IMF for all the Balance of Payments (BOP) and International Investment Position (IIP) financial account statements, and by both IMF BPM6 and OECD BD4 Manuals regarding the specific compilation of FDI statistics. This presentation is appropriate for macroeconomic analyses combining the five functional categories of investment used in the international accounts to classify international investment (direct investment, portfolio investment, other investment, financial derivatives and reserve assets).

Directional principle: Organises the FDI data according to the direction of the direct investment relationship (or according to the status of the resident entity), either abroad or in the reporting economy. FDI data are classified under:

• Direct investment abroad (DIA) when the resident entity is the direct investor and the non-resident entity is the direct investment enterprise.

• Direct investment in the reporting economy (DIRE) when the resident entity is the direct investment enterprise and the non-resident entity is the direct investor.

The directional principle has been extended to FDI data between fellows depending on whether the residence of the "Ultimate Controlling Parent (UCP)" is located in the compiling economy or not. FDI data between two resident/non-resident fellow enterprises will be classify under DIA if the UCP is also resident in the compiling economy, and  FDI data between two resident/non-resident fellow enterprises will be classify under DIRE if the UCP is not resident in the compiling economy. In case the UCP is unknown, the IMF recommends to classify the FDI assets between fellows under DIA and the FDI liabilities between fellows under DIRE.

The directional principle is more appropriate for studying the nature and motivations of foreign direct investment, for identifying the "origin" of direct investment made in a specific country, or for assessing the access of FDI capital to specific markets. The specific treatment of reverse transactions (see below) avoids an over-estimation of FDI totals, therefore provides a more realistic view of  the intensity of the DI-DIE links between two economies. For this reason, the directional principle is widely used for analytical purposes and international comparison.  Both IMF and OECD recommend this presentation when presenting detailed FDI statistics by country or by activity.

Eurostat uses the directional principle for the compilation and dissemination of EU FDI aggregates. Differences between the two presentations arise from differences in the treatment of reverse investments and fellow enterprises. Under the directional principle:

• Reverse investments are treated as withdrawals of capital initially invested, therefore deducted from the net outward or net inward totals.
• Transactions or positions involving fellow enterprises are classified according to the location of their common UCP.

The following table shows the classification of the different type of FDI data for each presentation:

It should be pointed out that, regardless of the selected presentation, the "net assets – net liabilities" total equals the "net outward – net inward" one.

Special Purpose Entities (SPEs) relate to flexible corporate structures with little or no physical presence and impact in the resident (host) economy. There is no internationally standard definition for these legal structures created by their (non-resident) parent enterprises but also acting as direct investor. The OECD Benchmark Definition (Box 6.2 p 102) offers 5 general criteria to assist national compilers to identify SPEs: A SPE is a 1) a legal entity, 2) ultimately controlled by a non-resident parent, 3) having no or few employees, little or no production in the host economy and little or no physical presence, 4) managing mainly external assets or liabilities and 5) acting mainly as a group financing, a conduit or a holding company. SPEs, holding companies or financial institutions serving other non-financial affiliates are particularly involved with the so-called "Funds in transit". Incorporation of SPEs is often associated with off-shore financial centres but they may also be found in other jurisdictions. The EU FDI regulation foresees the delivery of separate SPEs' FDI by (concerned) EU compilers, which are disseminated by Eurostat if not confidential together with an overall EU estimate.

Funds in transit (or pass-through funds) relate to funds that pass-through an enterprise resident in an economy to an affiliate in another economy without staying in the economy of that enterprise. If not corresponding to debt between selected affiliated financial corporations and even if they have little impact on the resident economy, they must be included in direct investment statistics (to promote symmetry and consistency among economies and keep coherence between FDI flows and positions aggregates). Compilers in economies that have large values of pass-through funds are encouraged to compile supplementary data. 

(FDI positions components)

FDI positions provide information on the total stock of investment (abroad and in the reporting economy) for a given reference date which is generally the end of the year. FDI positions data are useful for structural analysis of investment in the host economy, or investment in the investing (home) country, especially to establish the relative "FDI" importance/presence of an economy in another one. FDI positions data can be broken down by type of instrument, either equity or debt.

Equity positions cover all components of shareholders' funds, proportionate to the percentage of shares held. They include equity, contributed surplus, reinvestment of earnings, revaluations as well as any reserve accounts. Reinvestment of earnings apply only between a direct investor and a direct investment enterprise, therefore fellow enterprises are not concerned by this type of instrument. The recommended principle for the valuation of equity positions is the market valuation. Listed equity provides a good basis for the valuation of equity positions at market prices. For unlisted equity an approximation to market prices will be necessary and the international guidelines (OECD BD4 and IMF BPM6) offer some flexibility for national compilers in the choice of the valuation method, most widespread ones being the "Own fund at book value", "Recent transaction price" or "Net asset value" methods. The latter is recommended especially for the valuation of equity in branches (unincorporated DIE).

Debt positions cover all payables and receivables between enterprises in a direct investment relationship arising from loans, deposits, debt securities, trade credits, financial leases and non-participating preferred shares. As a reminder, It should be pointed out that:

• Financial derivatives are excluded from direct investment statistics.
• All debts between selected types of affiliated financial corporations are excluded from direct investment statistics.

FDI positions between the beginning and the end of a given year (n) may change either due to transactions that occurred during year n, or due to other valuation changes(exchange rate changes or price valuation changes occurring when trying to value at market prices), or due to other volume changes. A common issue impacting the latter is, for a given economic entity, the reclassification of its portfolio positions (ownership < 10%) to direct investment statistics if, during the year, this entity acquires additional shares "pushing" its ownership above the 10% thresholds.

The reconciliation exercise on annual FDI data is not operated (and not asked) by Eurostat, therefore FDI financial transactions and FDI positions are shown separately without the other valuation changes components.

(FDI flows - financial transactions components)

FDI flows are recorded in the financial account section of the balance of payments and relate to direct investment transaction made during the period in the form of equity capital acquisitions, debt transactions (in most cases loans or trade credits between affiliated enterprises) or reinvestment of earnings.

Equity capital comprises equity in branches, all shares in subsidiaries and associates (except non-participating, preferred shares that are treated as debt securities and are included under other FDI capital).

Reinvestment of earnings consists of the direct investor's share (in proportion to equity participation) of earnings not distributed by the direct investment enterprise. Reinvestment of earnings is an imputed transaction of the financial section of the Balance of Payment recorded simultaneously (same amount) with the reinvested earnings transaction recorded in the primary income section of the Balance of Payment (see below). The logic underlying this simultaneous recording of two fictive transactions is that one describes the allocation of the whole profits in the company's reserves (reinvestment of earnings in the equity capital of the direct investment enterprises), the other one being the remaining part of profits not distributed to shareholders in the form of dividends, and which stays in the accounts of the direct investment enterprise.

Debt transactions cover all transactions between enterprises in a direct investment relationship arising from loans, deposits, debt securities, trade credits, financial leases and non-participating preferred shares. As a reminder, financial derivatives and all debts between selected types of affiliated financial corporations are excluded from direct investment statistics, as are transactions between affiliates in financial assets issued by an unrelated party. The official expression covering all debt transactions between enterprises in a direct investment relationship is "inter-company lending". 

(FDI income components)

FDI income are recorded in the primary income section of the balance of payments and represents the return accruing to direct investors, during a reference year, for the provision of financial assets. FDI income categories are linked to the breakdown of FDI flows and stocks by kind of instrument. It consists of dividends and withdrawals from income of quasi-corporations, reinvested earnings and interests. Investment income on reverse investment – income receivable from claims on direct investors and income payable on liabilities to direct investment enterprises – is (in principle) shown on a gross basis.

Dividends and withdrawals from income of quasi-corporations

Dividends include dividends payable or receivable in the period gross of any withholding taxes. Dividends include payments due on common and preferred shares. The new BPM6 methodology includes the new concept of superdividends which relates to exceptional payments by corporations to their shareholders made out of accumulated reserves, disproportionately large compared to recent level of dividends and earnings. Superdividends are excluded from FDI income statistics because they are considered as withdrawals of equity. Liquidating dividends which arise mainly at the time of the termination of a company are also excluded from the income statistics, therefore also treated as withdrawals of equity. In practice, three dates can be associated with dividends: the date when they are declared, the date when they are excluded from the market price of shares (known as ex-dividend date) and the date when they are paid. Dividends must be recorded at the time the shares go ex-dividend.

Withdrawals from income of quasi-corporations mainly relate to the distributed branch profits. In legal terms, quasi-corporations cannot distribute income in the form of dividends but, in practice, owner(s) of a quasi-corporation may formally distribute part of (or all) their earnings. From an economic point of view, the withdrawal of such income is equivalent to the distribution of corporate income through dividends and is treated in the same way. Withdrawals from income of quasi-corporations are recorded when they actually take place.

(Transfer pricing) If a direct investment enterprise is overinvoiced on a good or service provided by the direct investor, or if a direct investor is underinvoiced on a good and service provided by the direct investment enterprise, then the transfer pricing acts as a hidden dividend and an adjustment to increase the dividends (up to market value) should be made in case of excessive overcharging or under-invoicing. In the opposite situation, the transfer pricing does not act as a dividend but as a hidden investment and, if significant, equity capital acquisitions component should be increased (up to market value).

Reinvested earnings (See also additional comments in the above FDI flows section). Reinvested earningsare the direct investors' share of the retained earnings of the direct investment enterprises and are attributed to direct investors who are in an immediate direct investment relationship with the direct investment enterprises (i.e. immediate 10% participation). The undistributed earnings of branches are also considered to be reinvested earnings. Formally, retained earnings (or net saving) of a resident direct investment enterprise (DIE) is equal to:

Net operating surplus

+ Dividends receivable + Interest receivable + Rent receivable

+ Enterprise's share of reinvested earnings coming from  any other (non-resident) DIE(s)

+ Current transfer receivable

- Dividends payable - Interest payable  - Rent payable

- Taxes and other current transfer payable

Reinvested earnings do not include any realised or unrealised holding gains or losses, therefore adjustments to business accounting records, prior the calculation, might be necessary.

Reinvested earnings can also be negative (i.e. recorded with a negative sign) when a DIE has a loss on its operations or the dividends declared in a period are larger than the net income generated during the same period.

Within a chain of direct investment relationships, reinvested earnings need only be recorded between the direct investor and directly owned direct investment enterprises, therefore there are no reinvested earnings between fellows and indirectly owned direct investment enterprises.

Interests

Interest (Income on debt) is a form of investment income that is receivable by the owners of deposits, debt securities, loans, non-preferred shares and other account receivable. Direct investment interest payables on liabilities, and receivables on assets, are separately recorded. Interest is recorded as accruing continuously over time to the creditor on the amount outstanding. Interest on debt accrues continually over the life of the debt and adds to the principal. Thus, actual payments of the debt (as opposed to accruals) are investment transactions and not income. Therefore, they should be recorded in the FDI transactions account. No direct investment interests are recorded when both parties are related financial intermediaries. In principle, interest receivables or payables on reverse loans is shown separately on a gross basis.

Which of the following refers to the amount of FDI undertaken over a given period normally a year )?

Which of the following is the type of FDI in which a firm moves upstream or downstream at different value chain stages in a host country?

Which of the following is a way in which governments increase the attractiveness of FDI and licensing relative to exporting?

What is downstream vertical FDI?