- International Monetary Fund
- Published Date:
- January 1985
The Fund’s Balance of Payments Manual defines foreign direct investment as investment made to acquire a lasting interest in a foreign enterprise with the purpose of having an effective voice in its management. Establishing a borderline to set direct investment apart from other types of capital flow can be difficult, since the difference basically depends on the motives of the investor. Many countries set a minimum proportion of foreign ownership of the voting stock (generally between 10 and 25 percent) as evidence of direct investment; sometimes several percentages are set, depending on how dispersed foreign ownership is.37 Equity investments in enterprises that do not have these minimum proportions of foreign ownership are classified as portfolio investment. All other term liabilities, that is, all other obligations that have a predetermined schedule of repayment, are classified as external debt.38
In principle, foreign direct investment flows include all funds provided by the direct investor, either directly or through affiliates. This includes equity capital, reinvested earnings, and net borrowing from the direct investor or its affiliates. Third-party loans guaranteed by the direct investor are not included, even though the investor assumes a potential liability and the loan might not have been possible without the existence of the direct investment in the subsidiary by the parent company. In practice, many developing and some industrial countries do not collect information on reinvested earnings, while borrowing by a subsidiary from a parent company is sometimes included in external debt statistics.
Statistics on direct investment flows to developing countries can be derived from either the source or the recipient country; both types of data are used in this report.
Source country data: direct investment flows from the principal capital-exporting industrial countries (i.e., members of the Development Assistance Committee) to developing countries are collected by the OECD. In principle, the flows include reinvested earnings, al-though in practice these are partly estimated and cannot always be allocated to individual recipient countries. Direct investment flows from the major oil exporting countries, or between other developing countries, are not included.
Recipient country data: direct investment flows into each developing country are reported to the Fund as part of its balance of payments statistics and are published in its annual Balance of Payments Statistics Yearbook. However, many countries do not report information on reinvested earnings. Current data on direct investment flows, sometimes based partially on Fund staff estimates, are also collected by the staff of the Fund in the course of regular consultations with member countries, and these are used in preparing the World Economic Outlook. Data used in the WEO do not give a breakdown between reinvested earnings and other components of direct investment.
Even for countries that do report reinvested earnings, there are often significant differences between statistics derived from source and recipient countries. These discrepancies are partly due to differences in coverage, since the data from source countries only cover capital-exporting industrial countries, but are also partly because of differences in accounting conventions, timing, and incomplete reporting. Discrepancies are not confined to data from developing countries—there are substantial differences between U.S. and U.K. statistics on direct investment flows between the two countries, for instance—and indicate that too much emphasis should not be placed on small fluctuations in recorded flows.
The statistics on direct investment flows to developing countries have, where necessary, been adjusted to exclude the effects of borrowing and other net capital flows between U.S. parent companies and their financial affiliates in the Netherlands Antilles. Such borrowing, which is substantial (amounting to over $9.5 billion in 1982) largely consists of Euromarket borrowing by the U.S. parent companies that is routed through their financial affiliates for tax purposes.
Although the detailed presentation of the Fund’s Balance of Payments Statistics makes provision for entries on portfolio investment in corporate equities, in practice recipient developing countries rarely collect separate data on such flows; if recorded at all, they are usually grouped with other categories of portfolio investment such as public sector bonds.39
Classification of Countries
The classification of countries in this report is that adopted by the Fund in December 1979 and used in its International Financial Statistics for the March 1980 and subsequent issues. Industrial countries comprise:
Germany, Federal Republic of
The developing countries are divided into two groups: oil exporting countries and non-oil developing countries. Oil exporting countries are:
Iran, Islamic Republic of
Libyan Arab Jamahiriya
United Arab Emirates
Non-oil developing countries include all Fund members (on December 31, 1983) except those listed above as being industrial countries or oil exporting countries, together with certain essentially autonomous dependent territories for which adequate statistics are available.
The classification of developing countries used by the OECD differs from that of the IMF; the principal differences are that the OECD classification does not include South Africa but does include Spain.
Among the developing countries, a subgroup of major borrowers is discussed in the text. This comprises those seven developing countries with total outstanding external indebtedness at the end of 1983 of at least $30 billion, or outstanding indebtedness to private creditors on the same date of at least $20 billion. These countries are: Argentina, Brazil, Indonesia, Korea, Mexico, the Philippines, and Venezuela.
It should be noted that the term “country” used in this document does not in all cases refer to a territorial entity that is a state as understood by international law and practice. The term also covers some territorial entities that are not states but for which statistical data are maintained and provided internationally on a separate and independent basis.
The following table lists a number of restrictions and regulations concerning foreign direct and portfolio investment, as well as repatriation of profits and capital from such investment, that were in effect at the end of 1983. Various fiscal incentives and disincentives affecting direct investment are not included; and a few restrictions (such as limits on foreign investments in national security and defense sectors) that are common to most countries are not mentioned specifically. The Annual Report on Exchange Arrangements and Exchange Restrictions of the International Monetary Fund was one of the principal sources for the table; as in that publication, it is not implied that any particular regulation necessarily constitutes an exchange restriction.
|Country||Regulations on Entry of Foreign Direct Investment||Regulations on Entry of Foreign Portfolio Investment||Regulations on Degree of Foreign Ownership||Regulations on Repatriation of Profits and Capital||Other Restrictions or Regulations|
|Algeria||Investment subject to approval.||Joint ventures receive special advantages, including guarantee of fair return on investment, tax exemptions of up to five years on profits, reduced taxes on reinvested profits, and the repatriation of royalties on technology transfers.||Remittances of profits and transfers of capital permitted only in respect of approved investments. Profit remittances on approved investments permitted up to 15 percent annually of original foreign capital.|
|Argentina||Prior approval by the National Executive required for, inter alia, investments in most public utilities, communications, energy, and in financial and insurance institutions; as well as for all investments exceeding $20 million.||Prior approval required if investments exceed $2 million for each foreign investor, or if total foreign investment exceeds 2 percent of the capital of the company involved.||Prior approval by the National Executive required for investments which involve changing the national ownership structure of a local firm with net assets exceeding $10 million. No prior approval required for new investments that do not exceed 30 percent of the registered capital of the receiving firm.||Annual after-tax profits on registered foreign capital are subject to an additional, progressive, tax when they exceed 12 percent of registered capital. In times of severe foreign exchange constraints profit transfers can be suspended and foreign investors will receive the equivalent sum in external public debt securities. Registered foreign investments may be repatriated after three years, unless a longer period was fixed when the investment was approved.||The extension of domestic credit to firms with foreign participation is subject to special provisions.|
|Brazil||Inward transfers are generally unrestricted, but, together with any reinvested profits, must be registered to assure repatriation of capital and profits. Oil exploration is controlled by the state petroleum monopoly.||Investments are subject to registration, and must be channeled through a Brazilian “investment company.” The minimum participation in portfolio investment companies is $1,000. Portfolio investments are exempt from capital gains tax.||Profit remittances and capital repatriation allowed for registered investments. Portfolio investments must remain in the country for at least three months.||Remittances of royalties by a branch or subsidiary to its head office are not allowed when 50 percent or more of the local firm’s voting capital is held by its foreign parent company. Foreign investment in certain sectors (e.g., computers) has also been restricted by the award of manufacturing licenses.|
|Chile||Authorization for investment is granted through a contract containing undertakings regarding the phasing of the investment program, which will normally not exceed eight years for mining and three years for other projects. Foreign investment in the oil sector is subject to authorization by the Empresa Nacional de Petroleo.||There are no limitations on profit remittances. Capital may be repatriated after three years.||Foreign investors can opt for a guaranteed 49.5 percent a year total corporation income tax over a period of 10 years, or may subject themselves to the tax system applicable to domestic corporations (currently 48.5 percent).|
|Colombia||All foreign investment subject to prior approval.||All foreign banks and their branches must have Colombian (or other Andean Pact country) majority participation, and purchases of 10 percent of more of the shares of a Colombian financial institution require the prior approval of the Banking Superintendent. To benefit from the duty free program of trade in the Andean Common Market, foreign-owned companies must agree to a. gradual program of increased local participation.||Transfer of profits limited to 20 percent of the investment a year. An additional 7 percent may be reinvested. These limitations do not apply to enterprises in which at least 80 percent of the capital is held by investors in countries of the Andean Pact, or to profits resulting from investments of outstanding importance or involving special risks.|
|New direct foreign investment in banks, insurance companies and other financial institutions is restricted to member countries of the Andean Pact, on the basis of reciprocal treatment, and to “national” (over 80 percent local ownership) and “mixed” (51 to 80 percent local ownership) companies. Foreign participation is also restricted in companies engaged in international resale of imported domestic products or in tourism. Capital invested in the petroleum industry is subject to special rules.|
|Egypt||The law concerning the investment of Arab and foreign funds and the Free Zones of 1974 (amended 1977) defines the treatment of new foreign investment. All incoming investment is subject to approval, which is based on its contribution to realizing development objectives. Special priority is given to projects designed to generate exports, encourage tourism, or reduce the need to import basic commodities.||Investment must generally take the form of joint ventures, but no specified minimum local participation is required, except for local currency banks (51 percent local participation), construction contracting (50 percent) and consultant firms (49 percent).||Specific rules for the repatriation of profits from each project are generally set at the time the project is approved, subject to overall policy guidelines. (For instance, permitted profit remittances on export-oriented projects are normally linked to the projects” export earnings.)Repatriation of capital normally requires prior approval, but this is generally granted provided the capital has been in Egypt for a least five years.|
|Hungary||Foreign investment in the form of joint ventures may be established subject to the approval of the Minister of Finance. Joint ventures may also be established in duty free zones, where they are subject to fewer regulations.||Foreign participation is generally limited to 49 percent, but a higher proportion may be allowed in the banking and service sectors. In other sectors, foreign majority participation requires special permission of the Minister of Finance.||A guarantee is given for the transfer of the foreign investors” share of profits.||A guarantee may also be obtained from the National Bank, covering losses on invested assets as a result of state measures, or from Hungarian banking institutions, covering the fulfillment of obligations of the Hungarian partner.|
|India||Reserve Bank permission is required for any business activity conducted by nonresidents, noncitizens, and Indian companies with over 40 percent nonresident interest.||Prior approval of the Reserve Bank is required for all transfers of shares of Indian companies by or to nonresidents.||Nonresident participation is normally limited to 40 percent, but participation up to 74 percent is allowed (on a sliding scale) depending on the extent to which a company is engaged in “core” industry or export-oriented production, or in manufacturing industries that require sophisticated technology. Full nonresident ownership is allowed for companies that export their entire production. In addition, all companies are subject to “dilution” formulas which require minimum percentages of the estimated cost of any expansion to be raised through additional equity capital issued to Indians.||Profit remittances by branches of foreign firms require the prior approval of the Reserve Bank. Remittances of dividends to nonresident shareholders do not require prior approval, provided certain conditions are met. Capital invested in approved projects after January 1950 may be repatriated, but Reserve Bank approval must be obtained before effecting a sale which involves repatriation of assets. Proceeds of approved sales are allowed to be remitted in suitable installments, not exceeding four.||Without Reserve Bank permission, residents are prohibited from lending to companies in which the nonresident interest exceeds 40 percent.|
|Indonesia||All investments require the approval of the President on the recommendation of the Investment Coordinating Board. The operating permit for foreign investment is usually valid for a maximum of 30 years.||In principle, investments may be undertaken only through a joint venture with an Indonesian partner.||No restrictions on profit remittances. The law provides that no transfer permit shall be issued for capital repatriation as long as investments benefit from tax relief; at present, however, foreign payments do not require a transfer permit.||A debt/investment conversion scheme exists, allowing foreign creditors holding nonguaranteed claims against Indonesia to use these claims to make investments under the Foreign Capital Investment Law.|
|Israel||No restrictions, but investments in certain approved sectors (including agriculture, industry and tourism, and export-oriented production) may be granted preferential treatment.||Nonresidents are permitted to purchase Israeli shares. In order to repatriate principal and profits, proof is required that purchases were made with foreign currency through an authorized dealer.||No restrictions.|
|Korea||All foreign investment requires approval. A list of eligible projects and activities open to foreign investment is maintained; this list has been expanded in recent years.||Korea has announced a program of gradual liberalization of the domestic securities market. At present, local investment trusts can sell unit certificates to foreign investors, and international investment trusts are permitted on a limited basis, but direct foreign acquisition of equity in local companies is normally not permitted.||Lists of activities are maintained in which full, and 50 percent, foreign participation is permissible.||No restrictions, but proposed remittances must be notified to the Ministry of Finance 90 days prior to the end of the fiscal year.||Foreign-controlled firms in certain industries are subject to limits on the proportion of their output which can be sold domestically.|
|Malaysia||Foreign investment requires prior approval, but most industries are open to such investment.||Under the New Economic Policy (NEP), targets have been set for minimum percentages of local ethnic- (bumiputra) and non-ethnic Malay ownership of total corporate assets by 1990, but these percentages do not necessarily apply to each individual company. Guidelines set targets for local ownership in manufacturing industry, on a sliding scale based on exports and new technological inputs.||No restrictions.||The Industrial Coordination Act of 1975 requires all firms (whether domestic- or foreign-owned) to obtain a license for each product manufactured. Granting of the license may be subject to various performance criteria, including dilution of foreign ownership.|
|Mexico||New foreign direct investment in Mexican banking or insurance companies and investment funds is prohibited, and certain sectors (including radio and television, public transportation and forestry) are reserved exclusively for Mexicans. Other sectors (including petroleum, basic petrochemicals, electricity and nuclear energy, railroads and telecommunications) are reserved for government investment. All foreign direct investment must be registered.||All acquisitions of stock in Mexican companies by foreigners must be registered within 30 days.||Foreign acquisition of more than 25 percent of the capital of a Mexican company requires prior authorization by the National Foreign Investment Commission. All new investments must have a majority participation of Mexican capital, except for cases specifically approved by the Foreign Investment Commission.||Payments of royalty and profit remittances are permitted up to 15 percent of equity, subject to foreign exchange availability. Balances in special foreign exchange accounts held by enterprises in the border areas and free zones can be used to make profit remittances.|
|Morocco||A new industrial investment code, which came into force in February 1983, provides for full foreign ownership and an easing of repatriation of capital. In addition, there are special incentives for investment in tourism.||Most transactions in securities involving nonresidents require approval.||After-tax earnings on approved investments by nonresidents are freely transferable. Transfer of dividends on nonresident-owned shares of Moroccan companies requires the approval of the Exchange Office.||Subject to approval, nonresidents” blocked capital accounts may be debited for investments in Morocco, provided that the amount debited does not exceed 50 percent of the investment undertaken by the nonresident and 25 percent of the company’s total capital.|
|Nigeria||Nonresidents intending to make direct investments in Nigeria may apply to the Ministry of Finance for approved status, the granting of which means that sympathetic consideration will be given to future requests to repatriate capital.||Approved status is not normally granted for share purchases unless this forms an integral part of an approved investment project.||Ceilings are set on foreign participation in the equity capital of enterprises in various sectors of the economy.||Profits and dividends remitted abroad and disbursed locally may not exceed 30 percent of a company’s capital stock. Repatriation of foreign capital requires approval from the Ministry of Finance.||Ministry of Finance permission is required for local borrowing by foreign-controlled companies.|
|Pakistan||Investments by non-residents are subject to approval, but the Government has announced a liberal policy toward foreign investors, to encourage industrial development.||Nonresident investments in shares of Pakistani companies is permitted, provided the investment is made on the basis of nonrepatriation of capital and dividends. Repatriation is not granted unless the share purchases are an integral part of an approved investment project.||There are no conditions laid down regarding local capital participation, but it is expected that local currency expenditures will ordinarily be met from local equity capital.||Profit remittances are allowed freely where the investment was made with Government’s approval. Foreign capital invested in approved industries after September 1954, including reinvested earnings and capital gains, may be transferred without restriction.|
|Peru||All foreign investment must be authorized and registered.||The required participation of national investors in the capital of an enterprise is not less than 15 per-cent, and this must be raised to at least 45 percent after 10 years and to at least 51 percent after 15 years. Foreign investment in firms engaged in basic industries or in mining (including petroleum) or that export over 80 percent of their production to outside the Andean Common Market are exempt, but these firms do not benefit from duty-free trade in the Andean Common Market.||Remittance of profits, including depletion and depreciation allowances, requires approval. In accordance with Andean Pact rules, profit remittances are limited to 20 percent of foreign capital a year, but a higher percentage may be permitted for investments that generate employment, are in underdeveloped areas, or help to diversify exports.||The effective interest rate on a new loan from a foreign parent company may not exceed by more than 3 percent the prevailing interest rate for first-class assets in the money market of the country in whose currency the transaction is conducted. Foreign enterprises may not have access to domestic credit on terms longer than three years or in amounts greater than their capital and reserves. Local-content rules are applied in the automobile industry.|
|Philippines||All investment is subject to the prior approval of the Central Bank. Preference is given to projects approved by the Board of Investments (BOI), to export-oriented industries, and to other industries not utilizing domestic credit resources.||New enterprises where investment by non-Filipinos exceeds 30 percent, and which are not covered by the Investment Incentives Act, require prior approval by the BOI. If purchases of shares by foreign nationals would reduce Philippine ownership in a firm to less than 70 percent, then permission from BOI is required. There are different arrangements for “pioneer” and “preferred” investments. Normally, enterprises owned or controlled by foreigners are allowed only in “pioneer areas of investment,” and at least 60 percent of outstanding voting capital stock of enterprises in “preferred areas of investment” must be owned by Philippine nationals.||Profit remittances are permitted in full, provided they are not financed from domestic borrowing. Full repatriation is guaranteed by law for cash investments made after March 1973 in export-oriented industries, enterprises approved by the BOI, and in securities certified by the Central Bank and traded on the Manila and Makati stock exchanges. Securities must be held for a minimum of 90 days. Noncash investments and cash investments made before March 1973 can be repatriated in a number of annual installments, according to the category of the investment and its net foreign exchange earnings.||Foreign companies can borrow locally provided they have a debt-equity ratio of no more than 60:40 in high priority sectors, 55:45 in medium priority sectors, and 50:50 in low priority sectors. Rules specifying a minimum local content have been established in various industries.|
|Portugal||Foreign investment is permitted in all sectors except those closed to private enterprise.||Under the Foreign Investment Code, remittances may be subject to phasing for up to one year, depending on the balance of payments situation. Special provisions allow transfers to be phased over a period not exceeding five years in cases of serious external imbalance, but these special provisions were not in force at the end of 1983.|
|Romania||Foreign investment in joint ventures is permitted.||Foreign capital participation is permitted up to 49 percent of total capital of the jointventure.||Repatriation of profits and capital is guaranteed.|
|South Africa||Inward transfers for investment in equity capital are freely permitted.||Profit remittances are permitted automatically provided they are not financed by local borrowing. If local credit facilities are used to finance such transfers then Reserve Bank approval is required, but favorable consideration is given provided the local borrowing is not excessive.||Local borrowing by nonresident-owned or controlled firms is subject to limitation.|
|Thailand||Certain economic activities are reserved for Thai nationals.||No restrictions on profit remittances. Foreign investments under the Investment Promotion Act are given a guarantee of capital repatriation. The repatriation of other capital is considered on the merits of each case, but approval is normally granted if it can be shown that the funds originated abroad.||There are also limits on the degree of foreign equity participation allowed in various activities eligible for incentives under the Investment Promotion Act. Local-content requirements exist in the automobile industry.|
|Turkey||Foreign investment requires approval.||Transactions in securities by nonresidents require approval. There are special facilities for the acquisition of Turkish shares and bonds by Turkish citizens working abroad.||Profit remittances and capital repatriation are guaranteed for investments made under the Law for the Encouragement of Foreign Investment. Foreign capital imported under the Petroleum Law is accorded additional preferential treatment. Other foreign investments are not entitled to any transfer facilities for earnings or liquidation proceeds.||Local borrowing by foreign companies is subject to quotas set according to their equity capital in Turkey. There are special arrangements for the utilization of blocked funds of nonresidents for investment in the tourist industry.|
|Venezuela||All foreign capital imported for investment purposes must be registered.||Certain activities (including most financial services, public services, broadcasting and communications) are reserved for “national” companies (i.e., with under 20 percent foreign ownership). To benefit from the duty free program of trade in the Andean Common Market, foreign-owned companies must agree to a gradual program of increased local participation., Companies that export over 80 percent of their production outside the Andean Common Market are not subject to this regulation.||In accordance with Andean Pact rules, profit remittances are limited, in principle, to 20 percent a year of registered foreign capital.||The Central Bank regulates domestic bank credit to companies more than 50 percent owned by nonresidents. Royalty payments are prohibited between parent companies and their majority-owned subsidiaries.|
|Foreign direct investment is governed by Andean Pact Regulations. Natural gas and iron mining operations are reserved for the state, and foreign investment in the petroleum sector is prohibited. New foreign investment in financial institutions is also prohibited.|
|Yugoslavia||Foreign investment is permitted through joint ventures only.||Apart from exceptional cases, foreign investment is limited to 49 percent of a joint venture’s capital.||Profit transfers are permitted up to one half of the joint ventures” foreign currency earnings from exports of goods and services. Profits from investments in under-developed regions may be repatriated in full.||If the law governing joint ventures were to be amended, a foreign investor would have the option of adopting the new legal provisions or of continuing under the old law during the entire life of the investment contract.|
Any attempt to compare movements in rates of return on foreign direct investment and interest rates on external debt with measures of host countries” ability to support such payments is made difficult by the poor quality of much of the data on direct investment, and its returns, in many developing countries. There are two key problems. First, adequate time series on reinvested earnings are only available for a few developing countries. Second, no measure of the true rate of return on direct investment is available, since data on the stock of direct investment are reported at book value rather than current market prices. It is not clear whether this leads to an under- or overestimation of the rate of return on direct investment. It will be overestimated to the extent that the book value of the stock of investment is less than its true value at current market prices, but is underestimated to the extent that no account can be taken of the fact that, unlike debt instruments, the value of direct investment assets is likely to rise with inflation. Consequently, all comparisons between estimated rates of return on direct investment and market interest rates can only be approximate.
The two simplest measures of movements in a host country’s ability to service its external liabilities are the rates of growth of its GDP and its exports. The greater the association between movements in income payments on external liabilities and movements in output, then the less expenditures will need to be reduced to generate resources to meet the payments. Similarly, the greater the association between movements in income payments on external liabilities and movements in export earnings, the fewer the resources that will need to be transferred between traded and nontraded sectors of the economy to generate the necessary foreign exchange for income payments. This latter connection is less strong, however, because the need for expenditure-switching policies is also affected by the scope for import substitution. Indeed, for many developing countries, particularly in Latin America, much of the external debt and foreign direct investment was accumulated in connection with import substitution rather than promotion of exports.
For a group of 12 non-oil developing countries (Brazil, Bolivia, Cameroon, Colombia, Costa Rica, El Salvador, Honduras, Israel, Jamaica, Mexico, Morocco, and Sierra Leone) with sufficiently long time series on reinvested earnings, rates of return on direct investment and average interest rates on external debt were compared with rates of growth of GDP and exports (both in dollar terms). Average rates of return and rates of growth were calculated for the group as a whole, on a GDP-weighted basis. The annual rate of return on direct investment was calculated as total income payments on direct investment (i.e., dividend and net interest payments plus reinvested earnings) as a percentage of the mean of the estimated stock of direct investment outstanding at the beginning and end of each year. The average interest rate on external debt was calculated as scheduled interest payments as a percentage of the mean of the stock of external debt outstanding at the beginning and end of each year.
The average rate of return on direct investment was positively associated with the rate of growth of GDP. An above- (or below-) average rate of growth of GDP was associated with an above- (or below-) average return on direct investment in all but one year between 1974 and 1982 (Chart 4). By contrast, there was little association between the rate of growth of GDP and the average interest rate paid on external debt (Chart 5). Over the entire period, however, the estimated average return on direct investment, which—for the reason mentioned above—can only be used as a rough guide, was higher than the average interest rate on external debt (at around 11 percent and 8½ percent, respectively), so that there may have been some positive trade-off between the risks and returns associated with equity and debt instruments.
Chart 4.Selected Non-Oil Developing Countries: Nominal GDP Growth and Rates of Return on Foreign Direct Investment, 1974–821
1 This chart plots the GDP-weighted estimated annual rate of return on foreign direct investment against the GDP-weighted rate of growth in nominal GDP (in U.S. dollar terms) for a group of 12 non-oil developing countries for which sufficient data were available: Bolivia, Brazil, Cameroon, Colombia, Costa Rica, El Salvador, Honduras, Israel, Jamaica, Mexico, Morocco, and Sierra Leone.
2Calculated as direct investment-related payments (i.e., dividend and interest plus reinvested earnings) as a percentage of the mean of the estimated stock of direct investment outstanding at the beginning and end of each period.
Chart 5.Selected Non-Oil Developing Countries: Nominal GDP Growth and Interest Rates on Outstanding External Debt, 1974–821
1 This chart plots the GDP-weighted estimated annual interest rate on outstanding external debt against the GDP-weighted rate of growth in nominal GDP (in U.S. dollar terms) for the same group of developing countries as in Chart 4.
2Scheduled interest payments as a percentage of the mean of the stock of external debt outstanding at the beginning and end of each period.
These trends can also be illustrated by simple least squares regressions of rates of return to direct investment (R.FDI) and to external debt (R.DEBT) against rates of growth of GDP (g), in dollar terms, in the host countries between 1973 and 1982 (all time series are GDP-weighted averages for the group of 12 countries). The regressions are not intended to be full models of the determinants of returns on direct investment or on external debt, but simply to illustrate the differences in their association with rates of economic growth.
where the figures in parentheses are t-statistics and * denotes significance at the 5 percent level. There was a significant positive association between growth of GDP and returns on direct investment, but no such association with interest payments on external debt. The choice of growth rate as the independent variable should not be taken as implying a single direction of causation since growth rates are also likely to be higher as a result of successful investments, as well as contributing to them. The return on direct investment appears to be less closely related to the rate of growth in exports of goods and services (g.exp).
However, this is not surprising since direct investment in many countries used in the sample tended to be largely oriented toward import substitution rather than exports. In particular, it was not possible to include any countries from Asia, because of lack of information on reinvested earnings.
More comprehensive information is available for rates of return of direct investment from the United States in the manufacturing sectors of developing countries.40 For this investment, there appears to be a positive association between rates of return on direct investment in manufacturing (US.ROR) and growth rates in non-oil GDP and non-oil exports of goods and services of developing countries (g and g.exp, respectively) over the period 1973–82:
where the figures in parentheses are t-statistics and ** denotes significance at the 1 percent level. Rates of return on direct investment were again more closely related to developments in non-oil GDP than in non-oil exports of goods and services. Regressions (not reported) of London interbank offer rate (LIBOR) on growth rates of non-oil GDP and exports yielded negative, and insignificant, coefficients.
|Average 1960–661||Average 1967–731||1974||1975||1976||1977||1978||1979||1980||1981||1982|
|Official development assistance||5.5||7.4||11.3||13.6||13.9||15.7||20.0||22.8||27.3||25.6||27.9|
|Other official flows||0.5||1.2||2.2||3.0||3.3||3.4||5.5||2.9||5.3||6.6||7.4|
|Official funds in support of private investment||…||…||…||…||0.8||0.4||0.7||0.7||0.8||1.5||2.0|
|Other nonconcessional (bilateral and multilateral)||0.7||2.1||3.7||7.6||13.2||13.4||23.3||26.3||18.7||29.3||28.9|
|Grants by private voluntary agencies||…||0.8||1.2||1.3||1.4||1.5||1.7||2.0||2.4||2.0||2.3|
|Stock of foreign direct investment1||Share of foreign direct investment in total gross external liabilities, 19833|
|1973||1983 estimate||Average annual growth, 1973-831|
|Total outstanding external debt, 19832|
(In billions of U.S. dollars)
|(In billions of U.S. dollars)|
|Seven major borrowers||20.0||59.6||11.5||350.1||14.5|
|Non-oil developing countries||47.0||140.9||11.6||685.5||17.0|
|1970||1982||Average annual growth rate, 1970–82|
|(In billions of U.S. dollars)|
|Germany, Fed. Rep. of||1.9||12.6||17.1|
|Other industrial countries2||0.2||1.1||15.3|
|Non-oil developing countries1||146||228||270||335||333||520||338||1,425||1,039||856|
|Mining and petroleum||Manufacturing||Other1||Mining and petroleum||Manufacturing||Other3|
|Germany, Fed. Rep. of||7.5||85.0||7.5||3.9||72.4||23.7|
Real growth of direct investment flows is measured by nominal growth deflated by the index of wholesale prices in the United States.
Gross external liabilities are defined as total external debt plus the stock of foreign direct investment.
Survey of Current Business, U.S. Department of Commerce(Washington), Vol 64 (No. 6, 1984), p. 75, Table 1.
These figures do not include outflows of direct investment from Hong Kong and Singapore, which do not collect regular statistics on these. The stock of Hong Kong- and Singapore-based direct investment in East Asian countries is estimated to have been around $1 billion and over $1/3billion, respectively, by the late 1970s. See Louis T. Wells, “Multinationals from Asian Developing Countries” in Research in International Business and Finance (London: Jai Press, Vol. 4, 1984).
Data for the United States exclude the overseas borrowing of U.S. parent companies channeled through their financial affiliates in the Netherlands Antilles.
Charles Oman, New Forms of International Investment in Developing Countries, Organization for Economic Cooperation and Development (Paris: OECD, 1984), p. 32.
C. Oman. ibid.
Complete information for 1983 is not yet available.
Gross remittances are calculated before deduction of the host countries” withholding taxes on dividends.
World Economic Outlook, Occasional Paper No. 21 (Washington, May 1983), Appendix A. Supplementary Note 7, pp. 140–44.
Bohn-Young Koo, “New Forms of Foreign Investment in Korea” and Pang Eng Fong, “Foreign Indirect Investment in Singapore” in Charles Oman, New Forms of International Investment in Developing Countries, Organization for Economic Cooperation and Development (Paris: OECD, 1984).
R. Vernon, Storm Over the Multinationals; the Real Issues (Cambridge, Massachusetts: Harvard University Press, 1977), p. 72, based on data from the Harvard Multinational Enterprise Project.
David J. Goldsbrough, “International Trade of Multinational Corporations and its Responsiveness to Changes in Aggregate Demand and Relative Prices,” Staff Papers, International Monetary Fund (Washington), Vol. 28 (September 1981).
G.K. Helleiner, Intra-Firm Trade and the Developing Countries (New York: St. Martin’s Press, 1981).
Oman, op. cit.
Organization for Economic Cooperation and Development, Declaration by the Governments of OECD Member Countries and Decisions of the OECD Council: On Guidelines for Multinational Enterprises, National Treatment, International Investment Incentives and Disincentives, and Consultation Procedures (Paris: OECD, 1976); Declaration by the Governments of OECD Member Countries and Decisions of the OECD Council: On International Investment and Multinational Enterprises (Paris: OECD, 1984).
A brief description of various restrictions and regulations concerning foreign direct and portfolio investment in effect at the end of 1983 in 25 of the largest borrowers among developing countries is given in Appendix II.
“Presentation by the International Finance Corporation on Portfolio Investment in the Third World Through a Third World Equity Fund,” a mimeographed paper given at a seminar organized by Salomon Brothers and the International Finance Corporation, September 16, 1981.
The information on Turkey comes from Hans Hammersbach, Manfred Werth, and Organization for Economic Cooperation and Development, Foreign Investment in Turkey; Changing Conditions under the New Economic Program (Paris: OECD, 1983), pp. 8 and 15.
Much of the discussion in this section is based on S. Guisinger, “Investment Incentives and Performance Requirements: A Comparative Analysis of Country Foreign Investment Strategies” (mimeo), World Bank, July 1983, Table 2, p. 9. This study also contains a more detailed analysis of some of the effects of various incentive policies.
In a survey of foreign direct investment decisions of major multinational companies conducted by the Group of Thirty, only 13 percent of respondents ranked host-country incentives among the top three factors affecting direct investment in developing countries in 1983. See Foreign Direct Investment, 1973–87 (New York: Group of Thirty, 1984).
International Monetary Fund, International Capital Markets; Recent Developments and Short-Term Prospects, Occasional Paper No. 1 (Washington, September 1980), Table 35 and International Capital Markets: Developments and Prospects, 1984, Occasional Paper No. 31 (Washington, August 1984), Table 43.
Ned G. Howenstine, “Growth of U.S. Multinational Companies, 1966–77,” Survey of Current Business, U.S. Department of Commerce (Washington), Vol. 64 (April 1982).
See I.M. Mantel, “Sources and Uses of Funds of Majority-Owned Foreign Affiliates of U.S. Companies, 1973–76,” Bureau of Economic Analysis Staff Paper, U.S. Department of Commerce, May 1979.
However, this was not always the case. The U.S. Foreign Direct Investment Program was in effect, with varying degrees of stringency, from the beginning of 1965 to mid-1973 (on a voluntary basis until 1968, and mandatory thereafter). Its aim was to limit the strain on the U.S. balance of payments resulting from direct investment outflows, and it imposed quantitative controls on U.S.-parent financing of foreign affiliates. The quotas took the form of a proportion of the firm’s direct investment in a geographic area during a specified benchmark period, but more liberal quotas were allowed for investments in developing countries. The program caused a large increase in affiliates” foreign borrowing from sources outside the multinational company, particularly during 1968 to 1970.
See S. Surrey, “United Nations Model Convention for Tax Treaties between Developed and Developing Countries: A Description and Analysis,” Harvard Law School, Selected Monographs on Taxation, Vol. 5 (Amsterdam: International Bureau of Fiscal Documentation, 1980).
Eugen Jehle, “Tax Incentives of Industrialized Countries for Private Undertakings in Developing Countries,” Bulletin for International Fiscal Documentation, International Fiscal Association (Amsterdam), Vol. 36 (No. 3, 1982). In addition, the Fiscal Affairs Department of the Fund has prepared a survey of the tax treatment of investment income in the major industrial countries: “Survey of Tax Treatment of Investment Income and Payments in Selected Industrial Countries,” by Jitendra R. Modi (unpublished, Washington: International Monetary Fund, Mar 1983).
Tax deferral also means that the investment decisions of “mature” subsidiaries (i.e., those that do not require new capital inflows from the parent company) are independent of the rate of home-county tax on income from foreign sources. See David G. Hartman, Tax Policy and Foreign Direct Investment, Working Paper No. 689 (New York: National Bureau of Economic Research, June 1981).
A description of the programs of individual countries is given in Organization for Economic Cooperation and Development, Investing in Developing Countries: OECDIDAC Member Countries” Policies and Facilities with Respect to Foreign Direct Investment in Developing Countries (Paris: OECD, 5th revised ed., 1982).
See Ibrahim Shihata, “Increasing Private Capital Flows to LDCs,” Finance & Development, World Bank and International Monetary Fund (Washington), Vol. 21 (December 1984).
The difference between the two means is statistically significant at the 1 percent level, on the basis of the Mann-Whitney test. The 28 countries that rescheduled their debt were: Argentina, Bolivia, Brazil. Central African Republic, Chile, Costa Rica, Dominican Republic, Ecuador, Guyana, Honduras, Jamaica, Madagascar, Malawi, Mexico, Morocco, Nicaragua, Niger, Nigeria, Peru, Philippines, Senegal, Sudan, Togo, Uruguay, Venezuela, Yugoslavia, Zaire, and Zambia.
Some hypothetical examples of the possible effects of various changes in real exchange rates on the earnings of direct investment enterprises in selected Latin American countries are given in Rudolph R. Rhomberg, “Private Capital Movements and Exchange Rates in Developing Countries,” Staff Papers, International Monetary Fund (Washington), Vol. 13 (March 1966).
David J. Goldsbrough, “The Role of Foreign Direct Investment in the External Adjustment Process,” Staff Papers, International Monetary Fund (Washington), Vol. 26 (December 1979).
International Monetary Fund, World Economic Outlook, Occasional Paper No. 27 (Washington, April 1984) and World Economic Outlook, September 1984, Occasional Paper No. 32 (Washington, September 1984).
In comparison, the survey of the intentions regarding direct investment of major multinational companies by the Group of Thirty suggests that the real increase in direct investment flows to developing countries during 1983–87 may be slower than during the previous ten years, although it will still be significant. See Foreign Direct Investment, 1973–87 (New York: Group of Thirty, 1984).
Group of Thirty (1984), op. cit.
A survey of member country concepts and practices concerning direct investment flows is given in International Monetary Fund, Balance of Payments Manual (Washington: IMF, 4th ed., 1977), Appendix E. See also Organization for Economic Cooperation and Development, Detailed Benchmark Definition of Foreign Direct Investment (Paris: OECD, 1983).
A detailed discussion of the conceptual and statistical aspects of measuring external debt is included in International Monetary Fund, External Indebtedness of Developing Countries, Occasional Paper No. 3 (Washington, 1981).
See International Monetary Fund, Balance of Payments Statistics Yearbook, 1983 (Washington: IMF, 1983), Part I, p. xvii.
U.S. Department of Commerce, Survey of Current Business, various issues.
Occasional Papers of the International Monetary Fund
*1. International Capital Markets: Recent Developments and Short-Term Prospects, by a Staff Team Headed by R.C. Williams, Exchange and Trade Relations Department. 1980.
2. Economic Stabilization and Growth in Portugal, by Hans O. Schmitt. 1981.
*3. External Indebtedness of Developing Countries, by a Staff Team Headed by Bahram Nowzad and Richard C. Williams. 1981.
*4. World Economic Outlook: A Survey by the Staff of the International Monetary Fund. 1981.
5. Trade Policy Developments in Industrial Countries, by S.J. Anjaria, Z. Iqbal, L.L. Perez, and W.S. Tseng. 1981.
6. The Multilateral System of Payments: Keynes, Convertibility, and the International Monetary Fund’s Articles of Agreement, by Joseph Gold. 1981.
7. International Capital Markets: Recent Developments and Short-Term Prospects, 1981, by a Staff Team Headed by Richard C. Williams, with G.G. Johnson. 1981.
8. Taxation in Sub-Saharan Africa. Part I: Tax Policy and Administration in Sub-Saharan Africa, by Carlos A. Aguirre, Peter S. Griffith, and M. Zuhtu Yucelik. Part II: A Statistical Evaluation of Taxation in Sub-Saharan Africa, by Vito Tanzi. 1981.
9. World Economic Outlook: A Survey by the Staff of the International Monetary Fund. 1982.
10. International Comparisons of Government Expenditure, by Alan A. Tait and Peter S. Heller. 1982.
11. Payments Arrangements and the Expansion of Trade in Eastern and Southern Africa, by Shailendra J. Anjaria, Sena Eken, and John F. Laker. 1982.
12. Effects of Slowdown in Industrial Countries on Growth in Non-Oil Developing Countries, by Morris Goldstein and Mohsin S. Khan. 1982.
13. Currency Convertibility in the Economic Community of West African States, by John B. McLenaghan, Saleh M. Nsouli, and Klaus-Walter Riechel. 1982.
14. International Capital Markets: Developments and Prospects, 1982, by a Staff Team Headed by Richard C. Williams, with G.G. Johnson. 1982.
15. Hungary: An Economic Survey, by a Staff Team Headed by Patrick de Fontenay. 1982.
16. Developments in International Trade Policy, by S.J. Anjaria, Z. Iqbal, N. Kirmani, and L.L. Perez. 1982.
17. Aspects of the International Banking Safety Net, by G.G. Johnson, with Richard K. Abrams.1983.
18. Oil Exporters” Economic Development in an Interdependent World, by Jahangir Amuzegar. 1983.
19. The European Monetary System: The Experience, 1979-82, by Horst Ungerer, with Owen Evans and Peter Nyberg. 1983.
20. Alternatives to the Central Bank in the Developing World, by Charles Collyns. 1983.
21. World Economic Outlook: A Survey by the Staff of the International Monetary Fund. 1983.
22. Interest Rate Policies in Developing Countries: A Study by the Research Department of the International Monetary Fund. 1983.
23. International Capital Markets: Developments and Prospects, 1983, by Richard Williams, Peter Keller, John Lipsky, and Donald Mathieson. 1983.
24. Government Employment and Pay: Some International Comparisons, by Peter S. Heller and Alan A. Tait. 1983. Revised 1984.
25. Recent Multilateral Debt Restructurings with Official and Bank Creditors, by a Staff Team Headed by E. Brau and R.C. Williams, with P.M. Keller and M. Nowak. 1983.
26. The Fund, Commercial Banks, and Member Countries, by Paul Mentre. 1984.
27. World Economic Outlook: A Survey by the Staff of the International Monetary Fund. 1984.
28. Exchange Rate Volatility and World Trade: A Study by the Research Department of the International Monetary Fund. 1984.
29. Issues in the Assessment of the Exchange Rates of Industrial Countries: A Study by the Research Department of the International Monetary Fund. 1984
30. The Exchange Rate System—Lessons of the Past and Options for the Future: A Study by the Research Department of the International Monetary Fund. 1984
31. International Capital Markets: Developments and Prospects, 1984, by Maxwell Watson, Peter Keller, and Donald Mathieson. 1984.
32. World Economic Outlook, September 1984: Revised Projections by the Staff of the International Monetary Fund. 1984.
33. Foreign Private Investment in Developing Countries: A Study by the Research Department of the International Monetary Fund. 1985.
International Monetary Fund, Washington, D.C. 20431, U.S.A.
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