Direct InvestmentMeasuring Flows and Positions

Course on Balance of Payments and International Investment Position Manual

(BPM6)

IMF-PFTACNadi

November 22-December 1, 2010

BP10

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)04/21/23 2

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

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04/21/23 JAI Tunis/L4:5

04/21/23 JAI Tunis/L4:6

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

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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

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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

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Coverage : Intercompany lending Cont.

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

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Coverage: Intercompany lending Cont.

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

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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

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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

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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

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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

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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’

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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

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Domestic links and direct investment

FDIR does not exclude ownership links between enterprises resident in the same economy

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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)

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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

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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

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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

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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 04/21/23 23

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

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Analytical use of different presentations

Data on both the asset/liability and directional principle bases of compilation are useful for different kinds of analysis

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Other issues with direct investment

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Reinvestment of earnings may be negative Direct investment flows in kind Mergers and acquisitions Corporate inversion and other restructuring Superdividends Borrowing for fiscal purposes

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

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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)

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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

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