Chapter

4. Definition of Direct Investment Enterprises and Direct Investors

Author(s):
International Monetary Fund
Published Date:
October 2003
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4.1 The BPM5 and the Benchmark define the concept of foreign direct investment as international investment by an entity resident in one economy in an enterprise resident in another economy that is made with the objective of obtaining a lasting interest. The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence on the management of the enterprise. Direct investment involves both the initial transaction that establishes the relationship between the two entities and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated.

4.2 According to the Benchmark and the BPM5, a direct investment enterprise is an incorporated or unincorporated enterprise in which a direct investor that is resident of another economy has 10 percent or more of the ordinary shares or voting power (for an incorporated enterprise) or the equivalent (for an unincorporated enterprise). The direct investor may be an individual, an incorporated or unincorporated private or public enterprise, a government, or an associated group of individuals or enterprises that has a direct investment enterprise in an economy other than that in which the direct investor resides. The ownership of 10 percent of ordinary shares or voting power is the criterion for determining the existence of a direct investment relationship.

4.3 Although the 10 percent equity ownership is specified in the Benchmark and the BPM5, some countries have chosen to permit two types of qualifications to that criterion. First, if a direct investor owns less than 10 percent of an enterprise but has an effective voice in management, the transactions between the investor and the enterprise are included in the FDI statistics. Second, if the investor owns 10 percent or more of the equity of the enterprise but does not have an effective voice in management, the enterprise is excluded from the FDI statistics. The application of these two qualifications is not recommended by the Benchmark or by the BPM5.

4.4 The next two sections present information on the extent to which the 61 countries that participated in the 2001 SIMSDI update follow the international standards for identifying direct investment enterprises and direct investors resident in the reporting economy. The third section provides information on the ways in which the countries account for indirectly owned direct investment enterprises in their FDI statistics. In these sections and the rest of the report, the practices of specific countries are compared against the international standards. The survey instrument provided no basis for determining the materiality (or significance) of any particular country’s deviation from the standards. In some cases, a deviation may seriously impair international comparisons; in others, it may have little impact.

Identification of Direct Investment Enterprises

4.5Table 4.1 shows the number of countries in 1997 and 2001 that use the 10 percent ownership threshold to identify direct investment enterprises resident in their economy (the inward FDI statistics), as well as those countries that use other qualifications to identify direct investment enterprises, and indicates the changes since 1997. Tables 15 and 16 of Appendix I provide details by country for 2001 for the inward transactions and inward position data.

4.6 The results of the 2001 update indicate that while an additional five countries now apply the 10 percent ownership threshold as their basic criterion, nine countries still use a criterion different from this to identify direct investment enterprises resident in their economies—the same number as in 1997. The table also indicates that 10 countries still include enterprises in which the nonresident direct investor owns less than 10 percent but has an effective voice in management—a decrease of only two countries since 1997. However, only three countries now exclude those enterprises in which the direct investor owns more than 10 percent but does not have an effective voice in management, and only six still use a value threshold. Five countries still treat unincorporated enterprises differently from incorporated enterprises (the same number as in 1997).

Table 4.1.Definitions Used for Identifying Direct Investment Enterprises Resident in the Reporting Economy (Inward FDI Transactions Data)
Countries That Apply the 10% Ownership Threshold but Use an Additional Qualification to the Threshold
Number of CountriesCountries That Apply the 10% Ownership Threshold as Their Basic CriterionCountries That Apply a Percentage of Ownership Different from the 10% ThresholdCountries That Apply a Value Threshold to Identify FDI EnterprisesCountries That Apply Different Treatments for Incorporated and Unincorporated FDI EnterprisesCountries that include enterprises in which the investor owns less than 10%, but has an effective voice in managementCountries that exclude enterprises in which the investor owns more than 10%, but has no effective voice in management
Total 2001 (61)55910365
Total 1997 (61)509125125
Change+50–2–2–60
OECD 2001 (30)2826242
OECD 1997 (29)2467243
Other 2001 (31)2774123
Other 1997 (32)2635382

OECD countries

4.7Table 15 of Appendix I shows that although 28 of the 29 OECD countries that compile inward FDI transactions data use the 10 percent equity ownership threshold as their basic criterion for at least part of their data for identifying direct investment enterprises resident in their economies, only 20 use the 10 percent threshold as their sole criterion. Table 16 indicates that only 18 of the 28 OECD countries that compile inward FDI position data use the 10 percent threshold as their sole criterion. The 2001 results indicate that two OECD countries (Italy and Turkey) use percentages of ownership that are different from the 10 percent threshold.1 Six OECD countries (Belgium, Korea, Mexico, the Netherlands, Norway, and Portugal) include in their inward FDI statistics enterprises in which the nonresident investor owns less than 10 percent but has an effective voice in management. (Korea does not compile inward FDI position data.) Two OECD countries (Korea and the Netherlands) exclude from their inward FDI statistics enterprises in which the nonresident investor owns more than 10 percent but does not have an effective voice in management. Four OECD countries (Belgium, Korea, the Netherlands, and New Zealand) apply a value threshold to identify direct investment enterprises resident in their economies. One country (Italy) treats unincorporated enterprises differently from incorporated enterprises in both its inward transactions and position data; Turkey, which does not compile inward FDI position data, makes this distinction for its inward FDI transactions data; and the Netherlands makes this distinction only for its inward position data.

Other countries

4.8 Although 27 of the 31 other IMF member countries that participated in the 2001 SIMSDI update use the 10 percent equity ownership threshold as their basic criterion for at least part of their data for identifying direct investment enterprises resident in their economies for their inward FDI transactions data, only 18 countries use the 10 percent threshold as their sole criterion. Table 16 indicates that only 15 of the 23 countries that compile inward FDI position data use the 10 percent threshold as their sole criterion. The 2001 results indicate that seven countries (including Chile, Indonesia, Israel, and the Philippines) use percentages of ownership that are different from the 10 percent threshold.2 Four countries (Argentina, Botswana, Israel, and Nigeria) include in their inward FDI statistics enterprises in which the nonresident investor owns less than 10 percent but has an effective voice in management. One country (Croatia) excludes from its inward FDI statistics enterprises in which the nonresident investor owns more than 10 percent but does not have an effective voice in management. Two countries (Croatia and Kazakhstan) apply a value threshold to identify direct investment enterprises resident in their economies, and three countries (Colombia, Croatia, and Israel) treat unincorporated enterprises differently from incorporated enterprises.

Table 4.2.Definitions Used for Identifying Direct Investors Resident in the Reporting Economy (Outward FDI Transactions Data)
Countries That Apply the 10% Ownership Threshold but Use an Additional Qualification to the Threshold
Number of CountriesCountries That Apply the 10% Ownership Threshold as Their Basic CriterionCountries That Apply a Percentage of Ownership Different from the 10% ThresholdCountries That Apply a Value Threshold to Identify FDI EnterprisesCountries That Apply Different Treatments for Incorporated and Unincorporated FDI EnterprisesCountries that include enterprises in which the investor owns less than 10%, but has an effective voice in managementCountries that exclude enterprises in which the investor owns more than 10%, but has no effective voice in management
Total 2001 (61)50910365
Total 1997 (61)43111210146
Change+7–2–2–7–8–1
OECD 2001 (30)2728352
OECD 1997 (29)2158442
Other 2001 (31)2372013
Other 1997 (32)22646104

Identification of Direct Investors

4.9Table 4.2 shows the number of countries in 1997 and 2001 that use the 10 percent ownership threshold to identify direct investors resident in their economies (direct investors abroad/the outward FDI statistics), as well as those countries that use other qualifications to identify direct investors. Tables 17 and 18 of Appendix I provide details by country for 2001. The 2001 results show relatively modest decreases since 1997 across all areas in the number of countries that use criteria other than the 10 percent ownership threshold to identify direct investors resident in their economies. Nevertheless, nine countries still use a criterion different from the 10 percent threshold to identify direct investors resident in their economies, and Table 4.2 indicates that 10 countries still include enterprises in which the investor owns less than 10 percent but has an effective voice in management. However, only three countries now exclude those enterprises in which the direct investor owns more than 10 percent but does not have an effective voice in management; only six still use a value threshold; and only five still treat unincorporated enterprises differently from incorporated enterprises.

OECD countries

4.10Table 17 of Appendix I shows that although 27 of the 28 OECD countries that compile outward FDI transactions data use the 10 percent equity ownership threshold as their basic criterion for identifying direct investors resident in their economies, only 16 use the 10 percent threshold as their sole criterion. Table 18 indicates that only 15 of the 27 OECD countries that compile outward FDI position data use the 10 percent threshold as their sole criterion. The 2001 results indicate that two OECD countries (Italy and Turkey) use percentages of ownership different from the 10 percent threshold.3 Eight OECD countries (Belgium, Canada, Iceland, Korea, the Netherlands, Norway, Portugal, and Switzerland) include in their outward FDI statistics enterprises in which the resident investor owns less than 10 percent but has an effective voice in management. (Korea does not compile outward FDI position data.) Three OECD countries (Canada, Korea, and the Netherlands) exclude from their outward FDI statistics enterprises in which the resident investor owns more than 10 percent but does not have an effective voice in management. Five OECD countries (Belgium, the Netherlands, New Zealand, Poland, and Switzerland) apply a value threshold to identify direct investors resident in their economies for both their transactions and position data, and Austria and Germany apply these thresholds to their position data. Two countries (Belgium and Italy) treat unincorporated enterprises differently from incorporated enterprises in both their transactions and position data and the Netherlands does so for its position data.

Other countries

4.11 Although 23 of the 28 countries that compile outward FDI transactions data use the 10 percent equity ownership threshold as their basic criterion for identifying direct investors resident in their economy, only 18 use the 10 percent threshold as their sole criterion. Only 13 of the 21 countries that compile outward FDI position data use the 10 percent equity ownership threshold as their sole criterion. The 2001 results indicate that seven countries (including Chile, Israel, the Philippines, and Thailand) use percentages of ownership different from the 10 percent threshold.4 Two countries (Botswana and Israel) include in their outward FDI statistics enterprises in which the resident investor owns less than 10 percent but has an effective voice in management. No countries now exclude from their outward FDI statistics enterprises in which the resident investor owns more than 10 percent but does not have an effective voice in management—a decrease of six countries since 1997. Only one country (Croatia) still applies a value threshold to identify direct investors resident in its economy—a decrease of nine countries since 1997—and only three countries (Colombia, Croatia, and Israel) still treat unincorporated enterprises differently from incorporated enterprises.

Treatment of Indirectly Owned Direct Investment Enterprises

4.12 According to the international standards, direct investment enterprises include those entities that are

  • subsidiaries (an enterprise in which a nonresident investor owns more than 50 percent);

  • associates (an enterprise in which a nonresident investor owns between 10 and 50 percent); and

  • branches (unincorporated enterprises wholly or jointly owned by a nonresident investor) of the direct investor

and are either directly or indirectly owned by the direct investor. As a result, once a direct investor owns 10 percent of an enterprise, certain other enterprises related to the first enterprise are also regarded as direct investment enterprises. The definition of direct investment enterprise therefore extends to:

  • branches and subsidiaries of subsidiaries of a direct investor (that is, a subsidiary in which a nonresident investor owns more than 50 percent);

  • enterprises in which subsidiaries of a direct investor have equity participation between 10 to 50 percent (i.e., nonresident associates); and

  • subsidiaries of nonresident associates of a direct investor.

4.13 Moreover, direct investment enterprises that are considered to be in a direct investment relationship with the same direct investor are also considered to be in a direct investment relationship with each other. The OECD Benchmark and the IMF Balance of Payments Compilation Guide describe the scope of both directly and indirectly owned enterprises that, in principle, should be included in the definition of direct investment. For convenience, this approach is referred to in the Benchmark as the Fully Consolidated System (FCS). To be considered to be fully applying the FCS, a country needs to include in its FDI statistics (1) the earnings data of indirectly owned direct investment enterprises, and (2) all equity capital and other capital transactions within a group of related enterprises, regardless of the percentage of ownership held by the related enterprises in each other.

Table 4.3.Indirectly Owned Direct Investment Enterprises in the Inward FDI Transactions Data
Number of CountriesCountries That Include Earnings Data of Indirectly Owned Direct Investment Enterprises in Their FDI StatisticsCountries That Include All Equity Capital and Other Capital Transactions Within a Group of Related Enterprises as FDI, Regardless of the Percentage of Ownership Held by the Related Enterprises in Each OtherCountries That Apply the Fully Consolidated System
Not appliedPartially appliedFully applied
Total 2001 (61)2930212811
Total 1997 (61)2726272011
Change+2+4–6+80
OECD 2001 (30)17205177
OECD 1997 (29)131371210
Other 2001 (31)121016114
Other 1997 (32)14132081

4.14Table 4.3 shows the number of countries that include the relevant transactions of their indirectly owned investment enterprises in their inward FDI income data and their inward FDI equity capital and other capital transactions data. The table indicates that only 11 of the 61 countries that participated in the 2001 SIMSDI update fully apply the FCS for their inward transactions data; there has been no change in the number since 1997. However, the table also indicates that in 2001 28 countries partially applied the FCS, 8 more than in 1997. Tables 19 and 20 of Appendix I provide details by country for the 2001 results and indicate that similar numbers of countries fully apply the FCS for the outward transactions data (12 countries), and the inward and outward FDI position data (13 and 14 countries, respectively). However, fewer countries partially apply the FCS for the FDI position data (20 for the inward data and 16 for the outward data) than for the FDI transactions data. A number of countries cite the difficulties in identifying all indirectly owned enterprises as a reason for not fully applying the FCS.

OECD countries

4.15 Seven OECD countries (Australia, Canada, Denmark, Iceland, Ireland, Norway, and Sweden) fully apply the FCS for their inward and outward transactions data; 17 partially apply it for their inward transactions data and 16 for their outward transactions data. However, two OECD countries, the United States and Switzerland, while not applying the FCS, fully apply the so-called “U.S. methodology,” which uses a somewhat different definition of related enterprises than the FCS.5 Nine OECD countries (Australia, Canada, Denmark, Iceland, Ireland, Norway, the Slovak Republic, Sweden, and the United Kingdom) fully apply the FCS for their inward and outward FDI position data. In addition, 14 OECD countries partially apply the FCS for their inward FDI position data, and 13 partially apply it for their outward FDI position data. Seventeen OECD countries include the relevant transactions of their indirectly owned investment enterprises in their inward FDI income transactions data, and 20 include these in their inward FDI equity capital and other capital transactions data—increases of four and seven countries, respectively, since 1997.

Other countries

4.16 Four non-OECD countries (Argentina, Botswana, Estonia, and South Africa) fully apply the FCS for their inward FDI transactions data, and these countries plus Israel also fully apply it for their outward FDI transactions data. Argentina, Botswana, Estonia, and South Africa also fully apply the FCS for both their inward and outward FDI position data, and Israel fully applies it for its outward position data. Singapore fully applies the U.S. methodology for its inward and outward transactions and position data. In addition, 11 countries partially apply the FCS for their inward FDI transactions data, 8 for their outward FDI transactions data, 6 for their inward FDI position data, and 3 for their outward FDI position data. Twelve countries include the relevant transactions of their indirectly owned investment enterprises in their inward FDI income data, and 10 include these in their inward FDI equity capital and other capital transactions data, decreases of 2 and 3 countries, respectively, since 1997.

Italy treats all unincorporated enterprises with foreign ownership as inward FDI, regardless of the percentage of ownership by nonresidents. Turkey treats all enterprises with foreign ownership as inward FDI, regardless of the percentage of ownership by nonresidents.

Chile treats all foreign investment, except U.S. foreign equity certificates of deposit (American Depository Receipts [ADRs]), debt securities, and investment funds, as inward FDI. Indonesia uses the criterion of a foreign enterprise as defined by the Investment Board (see the country metadata on the IMF website for details). Israel treats all nontraded enterprises with foreign ownership as inward FDI, regardless of the percentage ownership by nonresident investors. The Philippines treats all foreign investment, except equity securities transacted through the stock exchange, as inward FDI.

Italy treats all resident investors in unincorporated enterprises abroad as direct investors (outward FDI), regardless of the percentage of ownership by the resident investors. Turkey treats all investments abroad by Turkish residents as FDI abroad for its outward FDI transactions data. (Turkey does not compile outward FDI position data.)

Chile treats all resident investors abroad, except mutual funds, pension funds, and insurance companies, as direct investors abroad, regardless of their percentage of ownership. Israel treats all resident investors in nontraded enterprises abroad as direct investors abroad, regardless of their percentage of ownership. The Philippines treats all equity investment abroad by Philippine residents, except equity securities transacted through foreign stock exchanges, as FDI abroad. Thailand uses a percentage of ownership of 25 percent to define direct investors abroad.

The two systems differ in two ways in defining which indirectly owned enterprises are direct investment enterprises: (1) the U.S. methodology (USM) excludes, and the FCS may include, foreign enterprises in which the direct investor has less than a 10 percent indirectly held equity interest, and (2) the USM includes, and the FCS excludes, associates (minority-owned affiliates) of associates in which the direct investor has a 10 percent or more indirectly held equity interest.

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