Chapter

2. Units to Be Surveyed

Author(s):
Rita Mesias
Published Date:
October 2015
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Direct investment arises when a unit resident in one economy makes an investment that gives control1 or a significant degree of influence on the management of an enterprise that is resident in another economy. This concept is operationalized where a direct investor (DI) owns equity that entitles it to 10 percent2 or more of the voting power3 in the direct investment enterprise (DIENT) (which is usually equal to ownership of ordinary shares). Once that threshold has been reached, the units involved are said to be in a direct investment relationship, and the equity and debt instrument positions between the DI and the DIENT, and between all DIENTs of the same DI, are included in direct investment, except for debt between selected affiliated financial corporations.4 Included in direct investment are units that are under the control or influence of the same immediate or indirect investor, but do not have control or significant influence over one another. These units are known as “fellow enterprises.” Data in the CDIS are recorded by economy based on the location of the immediate counterpart economy relative to a direct investment position.

2.1 The purpose of this chapter is to explain how to help establish/update the survey frame, which is made up of the economy’s units that are DIENTs, DIs, and/or fellow enterprises. Delineating the units as DIENTs, DIs, and/or as fellows is important for at least two reasons. First, it helps in determining the type(s) of survey(s) required (e.g., a model survey form for direct investment into the reporting economy, or a model survey form for direct investment abroad by the reporting economy, as in Appendix IV). Second, it helps in compiling inward and outward direct investment data. Both DIs and DIENTs have to be institutional units, or constitute a group of institutional units under common ownership, that are residents of the economy in which the survey is conducted.

2.2 This chapter first provides simple examples of institutional units that are involved in a direct investment relationship. This is followed by examples where more than one resident institutional unit is involved, including local enterprise groups, and other complex examples of direct investment relationships. Finally, an overview is provided of sources that can be used to build a survey frame5 comprising resident direct investment units.

2.3 Compilers, especially those that will conduct a direct investment survey for the first time, may not have sufficient information to identify the most complex cases of institutional units involved in direct investment but nonetheless should proceed with the survey, because information for the more complex cases can often be developed or built up from less complex cases and from repetition of the survey.

Institutional Units Resident in an Economy

2.4 Units that are to be considered DIs, DIENTs, or fellow enterprises are institutional units in their own right, that is, they meet specific criteria such as having or potentially having their own set of accounts.6 Institutional units can be corporations (defined in statistical terms to include incorporated or unincorporated, private and public enterprises, investment funds, branches, notional resident units, trusts, and other quasicorporations), nonprofit institutions, government units, international organizations, individuals, and households. DIs could be any of the units previously mentioned.7

2.5 Direct investment institutional units generally involve corporations although nonprofit institutions and government units8 can also be involved in direct investment, as can households (the latter three as DIs only).9 It should be stressed that institutional units are not necessarily autonomous, as wholly-owned subsidiaries and branches are recognized as separate institutional units from their parent units. Each institutional unit is a resident of one and only one economic territory determined by its center of predominant economic interest.10 Although residency is generally established by occupying premises within an economic territory,11 a fixed location is not necessary so long as it remains within the economic territory. Actual or intended location for one year or more is used as an operational definition; while the choice of at least one year as a specific period is somewhat arbitrary, it is adopted to avoid uncertainty and facilitate international consistency. Appendix II provides more details on residence issues. It also discusses institutional sectors and provides a fuller description of the various types of institutional units, stressing direct investment relationships, such as the special cases of construction, and operators of mobile equipment abroad.

Direct Investment Institutional Units

2.6 By definition, there is crossborder ownership among institutional units that are involved in direct investment.12 This section reviews various cases of corporations (e.g., incorporated enterprises and quasicorporations including branches) in direct investment relationship. It also makes reference to households, government, and nonprofit institutions serving households (NPISHs) to the extent of their possible involvement in direct investment relationships. Appendix II (section B) provides further details on institutional units.

2.7 In the case of an incorporated entity (i.e., a legal entity), it is generally straightforward to identify the institutional unit (e.g., incorporated entities such as subsidiaries of foreign companies, investment funds, etc.). Direct investment is based on voting power13 that arises from ownership of equity (10 percent or more). Voting power often is on a one-share one-vote basis. It may however be greater or less than the percentage of shares held when there are “golden shares” or dual classes of shares (i.e., where some shares have higher weights that allow one or more parties to exercise voting power disproportionately to their share ownership).

2.8 In some cases, voting power may be exercised without commensurate ownership of shares. For instance, for unincorporated entities, covering branches and other quasicorporations,14 there are no shares in the sense of a tradable instrument. In such cases, it is important to delineate the units from their owner when the owner is resident of another economy. For instance, branches can be part of a single legal entity that operates in more than one economy; the branch and its nonresident parent should be considered two distinct institutional units, one resident, and the other, nonresident. As a general rule, an entity should not be combined with its owners if one or more owners are resident in another economic territory. The use of an economic territory as the scope of economic statistics means that each member of a group of affiliated enterprises is resident in the economy in which it is located, rather than being attributed to the economy of location of the head office.

2.9 If possible, the operations of a multiterritory enterprise15 in each territory should be treated according to the principles for identifying branches. If that is not feasible because operations are so seamless that a separate set of accounts is not maintained, it is necessary to prorate the total operations of the enterprise into the individual economic territories. Contributions to actual operations should be the basis for prorating16 the enterprise into each component economic territory, a process that compilers may find difficult to implement.

2.10 Financial corporations consist of all corporations and quasicorporations that are principally engaged in providing financial services, including insurance and pension fund services, to other institutional units. The production of financial services is the result of financial intermediation, financial risk management, liquidity transformation, or auxiliary financial services. It is important to identify financial intermediaries separately from other financial corporations, as any debt between financial intermediaries (except insurance corporations and pension funds) is excluded from direct investment (that is, both parties are financial intermediaries other than insurance corporations and pension funds).

2.11 The major financial intermediaries covered by the exclusion are deposit-taking corporations, money market funds (MMFs), non-MMF investment funds, and other financial intermediaries, except insurance corporations and pension funds. See Appendix II for a fuller description.

Recognition of Notional Units in Direct Investment17

Land and Other Natural Resources Owned by Nonresidents

2.12 Owners and purchasers of land and other natural resources within the economic territory are deemed to have a center of economic interest in the economy.18 If an owner or purchaser would not otherwise qualify as a resident unit, a notional unit is created for this purpose. The notional resident unit is deemed to purchase the land or immovable natural resource while the nonresident is deemed to purchase the equity of the notional unit and thus acquires a financial instead of a nonfinancial asset. The notional resident unit treatment is also applied when a nonresident owns buildings, structures, and other improvements on the land, leases land for long periods, or owns natural resources other than land. As a result of this treatment, the nonresident is the owner of the notional resident unit, rather than the direct owner of the land or other natural resources. The notional resident unit has an equity liability to the nonresident, and the land and other natural resources are therefore assets of the economy in which they are physically located.

2.13 Notional resident units are treated in the same manner as quasicorporations. If the owner of the equity of the notional resident unit fulfills the requirements for controlling or significantly influencing this unit, the transactions between the nonresident owner and the notional resident unit are classified as direct investment. Otherwise, these transactions are included in other investment, other equity in the International Investment Position (IIP).19

Long-term Lease

2.14 A very long-term lease20 to use land and other natural resources generally must be held by a resident.21 As noted previously, if a nonresident is involved in a long-term lease for the use of this type of asset, a notional resident unit is created, which is treated like a quasicorporation or branch.22 The notional resident unit is assumed to lease the asset. Under this recording treatment, the lease is between two residents, and the nonresident is deemed to hold equity ownership in the notional resident unit.

Housing

2.15 If a resident owns a house in another economy, it is treated as belonging to a notional resident in that economy. The legal owner is regarded as having a financial claim on the notional resident unit. The notional resident unit, therefore, should be treated as a DIENT that is wholly owned by a nonresident. Generally, the only asset of the notional unit is the house.23

Preliminary Expenses Incurred Before Establishing a Legal Entity

2.16 A resident enterprise is identified when preliminary expenses, including acquisitions of mining rights, license fees, site preparation costs, building permits, purchase taxes, local office expenses, and lawyers’ fees, are incurred prior to establishing a legal entity. As a result of identifying a quasicorporation, those preparatory expenses are recorded in the economy of the future operations as being resident-to-resident transactions that are funded by a direct investment inflow, rather than as sales of nonproduced assets to nonresidents, exports of legal services, and so on. Because of the limited scale of these activities, assembly of acceptable data for these enterprises is often feasible, despite the lack of incorporation. If the project does not subsequently go into operation, the value of the direct investment is eliminated by an entry for other changes in the volume of assets or liabilities.24

International Financial Centers, Units Involved with “In-Transit” or “Pass-Through” Finance, and Financial Intermediaries

2.17 Some DIENTs exist solely for the purpose of transferring funds—that is, funds that “pass through”25 an enterprise resident in an economy to an enterprise in another economy—and may take the form of special purpose entities (SPEs), holding companies, and financial institutions that serve other nonfinancial affiliates.26 These units are included in direct investment of an economy even though the funds they transfer may have little impact on the local economy. Not only are the units that are engaged in “pass-through” funding classified as direct investment units, but also the funds in-transit are included in direct investment (unless excluded because they represent debt between selected types of affiliated financial corporations). These funds are an integral part of a DI’s financial transactions and positions with affiliated enterprises; excluding these funds from direct investment would distort and substantially understate direct investment financial flows and positions at aggregate levels. On the other hand, the inclusion of these data in direct investment promotes symmetry and consistency among economies. It should also be noted that transactions and positions are commonly transformed by SPEs, from debt to equity, long-term to short-term, local currency to foreign currency, etc., and these transformations alter risk characteristics in important ways. For these reasons, positions with SPEs, and SPE positions with others, are important for analytical purposes. Also, there is, at present, no internationally agreed method to distinguish pass-through funds from other direct investment flows.

2.18 Physical presence in an economy is not a precondition for the existence of an institutional unit. For example, banking, insurance, investment funds (as distinct from their managers), securitization vehicles, and some SPEs often operate with little or no physical presence. Similarly, with virtual manufacturing, all the physical processes are outsourced to other units. In the absence of any significant physical dimension to an enterprise, its residence is determined according to the economic territory under which laws the enterprise is incorporated or registered.27

Estates, Trusts, and Partnerships

2.19 Estates, trusts, and partnerships are treated as separate institutional units if they are constituted in a different territory from that of their owners or beneficiaries.

Special Zones

2.20 It should be noted that sometimes an economy has a separate physical or legal zone that is under its control, but to which, to some degree, separate laws are applied. For example, a free trade zone or offshore financial center may be exempt from certain taxation or other laws. These special zones should always be included in the economic territory, because of the need to view the whole economy, to have comprehensive global data, and to be compatible with counterpart economy data.28

Selected Financial Corporations

2.21 As noted, debt positions between selected types of affiliated financial corporations should be excluded from direct investment and included instead in portfolio investments or other investments, as appropriate.29 Financial corporations consist of all corporations and quasicorporations that are principally engaged in providing financial services, including insurance and pension fund services, to other institutional units. The production of financial services is the result of financial intermediation, financial risk management, liquidity transformation, or auxiliary financial services. Financial corporations can be divided in three broad classes, namely, financial intermediaries, financial auxiliaries, and other financial corporations.

2.22 The selected financial intermediaries include deposit-taking corporations (including the central bank), money market funds (MMF), non-MMF investment funds, and other financial intermediaries except insurance corporations and pension funds. All debt instrument positions between these selected types of affiliated financial corporations are excluded from direct investment (but equity positions between all types of affiliated financial corporations should be included in direct investment). For example, deposits and other amounts lent by a parent bank or other financial intermediary to its DIENT located abroad that is also a financial intermediary, and deposits and other borrowings taken from such offices, should not be classified as direct investment. Both affiliated parties must be one of the selected types of financial corporations, but they need not be the same type of financial corporation. In other words, the usual direct investment definitions apply for insurance corporations, pension funds, financial auxiliaries, and “other” financial corporations.30

2.23Appendix II provides a fuller description of five types31 of financial intermediaries whose debt instrument positions with other financial intermediaries abroad should be excluded. It is suggested that the collection form separately identify those resident entities that meet the definition of any of these five types of financial intermediaries. This will provide a basis for future research by the compilers, because very large debt positions by any of these resident enterprises with a related foreign enterprise may be misrecorded in direct investment.

2.24 Debt instrument positions by financial intermediaries with related nonresident entities that are not financial intermediaries should be included in direct investment. Also, debt instrument positions by resident entities that are not financial intermediaries with related nonresident financial intermediaries should be included in direct investment. Thus, all debt instrument positions by resident corporations with related nonresident nonfinancial corporations, as well as all debt instrument positions by resident nonfinancial corporations with related nonresident corporations, should be included in direct investment.

Governments

2.25 Governments are unique kinds of legal entities established by political processes and have legislative, judicial, or executive authority over other institutional units within a given area. Viewed as institutional units, the principal functions of governments are to assume responsibility for the provision of goods and services to the community or individual households and to finance their provision out of taxation or other incomes; to redistribute income and wealth by means of transfers; and to engage in nonmarket production. Governments can be involved in direct investment operations only as DIs.

Households

2.26 Households are also institutional units. A household is resident in the economic territory in which household members maintain a dwelling or succession of dwellings treated and used by members of the household as their principal dwelling. Similar to the other types of institutional units, households can be DIs by holding voting power over businesses. Also, resident households can own real estate abroad (and nonresident households can own real estate in the compiling economy)32 that, by convention, is treated as direct investment. However, the data on such investments are often difficult to obtain directly from households, and so other means may need to be used to compile the statistics.33

Nonprofit Institutions Serving Households

2.27 Nonprofit institutions serving households (NPISHs) are units mainly engaged in providing goods and services to households or the community at large free of charge or at prices that are not economically significant (and thus are classified as nonmarket producers), except those that are controlled and mainly financed by government units. Examples include charities, relief and aid organizations financed by voluntary transfers as well as trade unions, professional or learned societies, consumers’ associations, religious institutions, and social, cultural, and recreational clubs, where these do not charge economically significant prices. A NPISH may not be a DIENT, as it is not created with the intention of repatriating earnings to its investor. However, a NPISH may be a DI in a for-profit nonresident entity.34

Sources for Identifying Direct Investment Units for the Survey Frame

2.28 The sources of information on potential survey respondents having foreign ownership and/or investment in enterprises abroad are varied, and the work required to compile an information database will depend on the extent to which such an information database already exists in the compiling agency. For instance, local head offices may report on behalf of all business units that they control in the compiling economy. This group approach for reporting limits the number of units that need to be approached to those that can best provide the information. Where there is reporting for the group, it is important for the respondents to note which units within the enterprise group are covered in their submitted report(s). (See the next section, “Direct Investment Enterprises and Direct Investors”).

2.29 The following represent some of the sources for compiling a list of enterprises in a direct investment relationship:

  • Records of businesses maintained by the national statistical agency or other government agencies. The businesses can be approached with brief screening surveys, asking whether they have foreign ownership or whether they have investments in enterprises abroad.

  • Business data collections already run by the statistical agency or other government agencies. Information necessary for a direct investment information database may be elicited from another survey, either by direct inspection of the other survey’s register or by adding one or two exploratory questions to that survey.35

  • Telephone directories

  • Government administrative sources, which might include:

    • ❍ Information held by foreign investment approval or monitoring boards; statutory company reports and company registration details

    • ❍ Records held in a foreign exchange control or an international transactions reporting system (ITRS), for example, records identifying the originators or recipients of direct investment flows

    • ❍ Taxation records, files, or lists.36

  • Other official and regulatory sources include annual statutory accounts for public companies.

  • Media reports. Newspapers and periodicals are particularly useful sources for information on potential reporting entities. A high proportion of significant transactions are reported in the media and these may be used not only to update the information database, but also to cross-check data reported in the survey. The use of traditional print media may be supplemented with information obtained electronically from commercial business news services and via the Internet.

  • Publicly available databases and reports may provide a wide variety of information, including the stock exchange register (additional helpful information may also be provided by the stock exchange); commercial equity registry information services; international credit rating agencies’ publications; market research reports or services by accounting or brokerage firms; and information on unincorporated DIENTs, including wholly-owned subsidiaries of multinational enterprises.

  • Trade associations can be a useful source of information. Apart from the positive public relations aspects of a close relationship between the statistical agency and trade associations, many trade associations can make available lists of members, often with indications of their financial size. Particularly in the financial sector, their members may be significant users of official statistics and thus have a vested interest in promoting provision of accurate data and in assisting statistical data collection agencies.

  • Information from investment promotion agencies and other government sources can be used to determine the coverage of the survey, even though not all of the investment intentions may have been carried out. Similarly, reports in the financial press may indicate that discussions have taken place on possible crossborder investment but there may be insufficient information to confirm that the investment was consummated. These leads should also be included in the frame, if sizeable. In many instances, the compilers may be familiar with the ownership structures of firms, such as in the oil and gas sector or banking. In other cases, such as in the case of goods/ services exporters and importers, it may be difficult to know if there are any foreign ownership links and national compilers should consider surveying the largest firms, based on available information, (e.g., based on the value of trade flows, balance sheets, etc.). In effect, the first survey will partly be an exploratory survey.

2.30 Where a direct investment survey is being conducted for the first time or is a relatively new undertaking, the focus should initially be on all large potential DIENTs and DIs. From there, work to identify other, small- and medium-sized firms can be progressively developed, as resources permit. The matter of response and compilation burden will also need to be taken into account in deciding coverage and follow-up efforts when firms fail to respond on time or report questionable data.

Direct Investment Enterprises and Direct Investors

2.31 In many cases, notably for economies conducting a direct investment survey for the first time, the survey results will help to establish if a unit is a DIENT and/or a DI or a fellow enterprise. In other cases that are covered in this section, the information on the relationships between units may be available from previous survey results or other sources. This section provides guidance on the reporting units in such cases. In simpler cases, a DIENT may be a single resident institutional unit that has at least 10 percent of its voting power held by a nonresident DI; similarly, a DI may be a single resident institutional unit that has at least 10 percent voting power in a nonresident DIENT.

2.32 The DIENT as well as the DI can also involve several institutional units that are residents in the same economy. When these units are consolidated or combined for statistical purposes into a single DI or DIENT, they are referred to as a local enterprise group (LEG).

2.33 In the case of a resident DI, the LEG includes not only the institutional unit with direct investment abroad, but also the institutional units that it directly or indirectly controls in its own (local) economy. Looking up its ownership chain, the LEG includes the resident institutional units that directly or indirectly control it; and looking down the ownership chains of each of these enterprises, the LEG includes resident enterprises along an unbroken chain of control. Thus, in the case of a resident DI, LEGs include only controlled resident units.

2.34 In the case of a resident DIENT, the LEG includes the resident enterprise that is directly controlled or that has a significant degree of influence by a DI, plus the institutional units that it directly or indirectly controls in its own (local) economy. Thus, two DIENTs in the same economy, directly owned and controlled by the same DI, are not in a LEG.

Local Enterprise Groups as DIENTs and as DIs

Examples of Treatment of DIENTs That Are Residents in the Same Economy

2.35 In Figure 2.1, Enterprise A, resident in Economy 1, owns all the equity in Enterprise B (50), which is resident in Economy 2. Enterprise B owns all the equity in Enterprise C (25), also resident in Economy 2. Enterprise A has lent 75 to Enterprise C. In the previous instance, Enterprises B and C represent the LEG, and Enterprises B and C could be reported as a consolidated enterprise or separately, whether Enterprise B is an operating enterprise or a holding company.

Figure 2.1Example 1: LEG of Inward Direct Investment

2.36 In Figure 2.2, Enterprise A, resident in Economy 1, owns all the equity in Enterprise B (50), which is resident in Economy 2. Enterprise A also owns all the equity in Enterprise C (25), which is also resident in Economy 2. Enterprise A has lent 75 to Enterprise C. In this instance, B and C Enterprises do not represent a LEG, as Enterprise B does not control Enterprise C, and Enterprise C does not control Enterprise B. It is recommended that these enterprises report separately.

Figure 2.2Example 2: Not a LEG for Inward Direct Investment

2.37 If a DI has several related resident enterprises that invest abroad in other related entities, the whole of the LEG can be regarded as one unit. In figure 2.3, Enterprise A owns 100 percent of Enterprise D and both are residents of the same economy; Enterprise A has a direct investment ownership interest in Enterprise B, and Enterprise D has a direct investment relationship with Enterprise C (because both Enterprises C and D have Enterprise A as a common owner, either directly or indirectly). In this instance, economies may treat Enterprises A and D as one statistical unit, and Enterprises B and C as one statistical unit.

Figure 2.3Example 3: LEG for Outward Direct Investment

Determining Direct Investment Relationships

2.38 As can be seen with the LEGs, the underlying ownership links of direct investment can be quite complicated. To understand what is, and what is not, direct investment, different methods have been developed to provide criteria for determining whether crossborder ownership results in a direct investment relationship, based on control and/or a significant degree of influence.

2.39 Control or a significant degree of influence may be achieved directly through direct ownership of equity that gives voting power in the enterprise, or indirectly by having voting power in another enterprise that has voting power in the enterprise. Accordingly, two ways of having control or significant influence are identified:

  • (1) Immediate direct investment relationships arise when a DI directly owns equity that entitles it to 10 percent or more of the voting power in the DIENT.

    • Control is determined to exist if the DI owns more than 50 percent of the voting power in the DIENT.

    • A significant degree of influence is determined to exist if the DI owns from 10 to 50 percent of the voting power in the DIENT.

  • (2) Indirect direct investment relationships arise through the ownership of voting power in one DIENT that owns voting power in another enterprise or enterprises, that is, an entity is able to exercise indirect control or influence through a chain of direct investment relationships. For example, an enterprise may have an immediate direct investment relationship with a second enterprise that has an immediate direct investment relationship with a third enterprise. Although the first enterprise has no direct ownership of equity in the third enterprise, it can exercise indirect control or significant influence (see paragraph 6.14 in BPM6).

2.40 In addition to direct investment relationships between two enterprises that arise because one enterprise directly controls or directly significantly influences the other, there are also direct investment relationships between two enterprises that do not control or significantly influence each other, but that are both under the control or significant influence of the same investor.

2.41 This Guide presents three methods for determining a direct investment relationship: the Framework of Direct Investment Relationships (FDIR), the Direct Influence/Indirect Control Method (DIIC Method), and the Participation Multiplication Method (PMM). Under BPM6 and OECD Benchmark Definition of Foreign Direct Investment, 4th edition (BD4), the FDIR is the conceptually preferred method of identifying entities that are in a direct investment relationship. Economies that are not currently collecting data on any of these three different methods should consider initially37 adopting one of the two simpler methods (the DIIC Method or the PMM) to identify direct investment relationships.

Framework of Direct Investment Relationships

2.42 The FDIR is a generalized methodology for identifying and determining the extent and type of direct investment relationships. In other words, the FDIR allows compilers to determine the population of DIs and DIENTs to be included in direct investment statistics.

2.43 The FDIR38 identifies all enterprises affiliated with a DI. For example, it is possible that a DIENT owns 10 percent or more of the voting power of another enterprise, in which case the DIENT is itself a DI in a further DIENT. The question is–is there a direct investment relationship between the further enterprise and the original enterprise?

2.44 In Figure 2.4, Enterprises A, B, and C are in different economies. Enterprise A owns 80 percent of the voting power in Enterprise B and is a DI in Enterprise B. Enterprise B, in turn, owns 80 percent of the voting power in Enterprise C and is a DI in Enterprise C. Enterprise A has control over Enterprise B, and through its control over Enterprise B, has control over Enterprise C. As a result, financial transactions between Enterprise A and Enterprise C cannot be considered to be disinterested, even though Enterprise A directly holds no equity in Enterprise C. It is reasonable to consider Enterprises A and C to be in a direct investment relationship in which Enterprise A indirectly is a DI in Enterprise C. Financial transactions and positions between Enterprise A and Enterprise C should be included in direct investment.

Figure 2.4FDIR-Continuation of Control

2.45 In relatively simple cases such as that in Figure 2.4, where each link in the ownership chain is a single equity holding and there is majority ownership (control) at each stage, it is clear that the direct investment relationship continues down the chain of ownership. However, when some links are noncontrolling links and voting power of an enterprise is held by more than one member of a direct investment relationship, the extent of the relationship may be less obvious.

2.46 It is not uncommon for an entity to be a DI in more than one DIENT. In Figure 2.5, Enterprises A, B, and C are each in different economies. Enterprise A owns 80 percent of the voting power in Enterprise B and is a DI in Enterprise B. Enterprise A also owns 20 percent of the voting power in Enterprise C and is a DI in Enterprise C. Enterprise A controls Enterprise B and has significant influence over Enterprise C. As a result, financial transactions and positions between Enterprises B and C are also relevant for direct investment statistics even though there is no equity participation between them. For example, Enterprise B may raise capital that it lends to Enterprise C at a concessional rate due to the control by Enterprise A. It is reasonable to consider Enterprises A, B, and C to be in the same direct investment relationship—Enterprises B and C are considered “fellow enterprises” of one another.

Figure 2.5FDIR-Fellow Enterprises

2.47 In Figure 2.6, there are two overlapping direct investment relationships, one with Enterprise A as the DI and the other with Enterprise B as the DI. The DIENT, Enterprise C, is in a direct investment relationship with Enterprises A and B. Enterprise C is controlled by DI Enterprise A, which owns 70 percent of the voting power of Enterprise C, and Enterprise C is significantly influenced by DI Enterprise B, which owns 20 percent of the voting power of Enterprise C. Despite their common ownership of Enterprise C, Enterprises A and B are not in a direct investment relationship with each other.39

Figure 2.6FDIR-Multiple Investors

Direct Influence/Indirect Control Method (DIIC Method)

2.48 The DIIC Method includes in direct investment all enterprises whose voting power are 10 percent or more directly owned, plus all enterprises that are controlled by them (ownership of more than 50 percent of the voting power), plus all other enterprises in a continuous chain of majority ownership.40

2.49 This method allows the first link in an ownership chain to be a noncontrolling (influencing) link, but all subsequent links must be controlling links. In Figure 2.7 according to the DIIC Method, Enterprises B and C are in a direct investment relationship with Enterprise A and with each other; Enterprises E and G are also in a direct investment relationship with enterprise A (indirectly), Enterprises B and C and with each other, while Enterprise D is only in a direct investment relationship with Enterprises B and E, and Enterprise F is in a direct investment relationship with only Enterprises C and G.

Figure 2.7Direct Influence/Indirect Control Method

2.50 Looking at Figure 2.7 from the perspective of Enterprise A, under the DIIC Method, Enterprise A is in a direct investment relationship with all enterprises below it in the chain except Enterprises D and F (because they are indirectly owned associates; an associate is an enterprise that is owned at least 10 percent but not more than 50 percent).

2.51 Thus the DIIC Method breaks the ownership chain at the second influencing link (as in the FDIR). On the other hand (and contrary to the FDIR), the DIIC Method also breaks the ownership chain at the first influencing link where the first link from the DI is a controlling link. As such, the DIIC Method will always identify the enterprises in a direct investment relationship as a subset of those identified by the FDIR.

Participation Multiplication Method (PMM)

2.52 The PMM includes in direct investment all enterprises in which an investor has voting equity participation of at least 10 percent. The calculation of participation percentage is based on a straight multiplication and summation of direct and indirect participation percentages.

2.53 More specifically, an indirect participation in a given enterprise at the bottom of a chain of ownership is calculated by taking the investor’s participation in the first enterprise, multiplied by the first enterprise’s participation in the next enterprise, multiplied by the corresponding percentages for all other intervening enterprises in the chain, multiplied by the last intervening enterprise’s participation in the given enterprise. In Figure 2.8 according to this method, Enterprise A has a 16 percent participation in Enterprise C (20 percent of 80 percent). Because this participation is at least 10 percent, Enterprises A and C are regarded as being in a direct investment relationship.

Figure 2.8Participation Multiplication Method: Example 1

2.54 If the investor’s interest is held through more than one participation chain, then the percentages of direct and indirect participation in all chains are summed to determine the investor’s total participation percentage. If the combined direct and indirect participation percentage is less than 10 percent in an enterprise in another economy, then that enterprise is not considered to be in a direct investment relationship with the investor. In Figure 2.9, Enterprise A holds 3 percent of Enterprise D indirectly through Enterprise B and 9 percent of Enterprise D indirectly through Enterprise C, so Enterprise A holds a total of 12 percent of Enterprise D from its combined holdings through Enterprises B and C.

Figure 2.9Participation Multiplication Method: Example 2

Control or significant influence may be achieved directly by owning equity that gives voting power in the enterprise, or indirectly by having voting power in another enterprise that has voting power in the enterprise. See paragraph 6.12 in the sixth edition of the Balance of Payments and International Investment Position Manual, IMF (BPM6).

In practice, significant influence may arise in some cases with less than 10 percent of voting power. However, for the CDIS, a threshold of at least 10 percent ownership of voting power is adopted for consistency with other international guidelines and to facilitate international comparability (see paragraph 6.13 in BPM6).

Voting power in direct investment is explained in paragraphs 6.12 and 6.19 in BPM6.

Debt between selected affiliated financial corporations is not classified as direct investment because it is not considered to be so strongly connected to the direct investment relationship (see paragraphs 2.21–2.23).

The survey frame comprises the set of units subject to the CDIS and the details about those units that can facilitate the conduct of the survey (see more in Chapter 5).

The main attributes of an institutional unit are that it is entitled to own goods or other assets in its own right; it is, therefore, able to exchange the ownership of goods or other assets in transactions with other institutional units; it is able to take economic decisions and engage in economic activities for which it is itself held to be directly responsible and accountable at law; it is able to incur liabilities on its own behalf, to take on other obligations or future commitments, and to enter into contracts; and has a complete set of accounts, including a balance sheet, or it would be possible and meaningful, from both an economic and legal viewpoint, to compile a complete set of accounts, if they were to be required. For additional information about units, see paragraphs 4.12–4.56 in BPM6.

See paragraphs 6.20 and 6.21in BPM6.

Borrowing for fiscal purposes is described in paragraphs 8.24–8.26 in BPM6. The 2013 External Debt Statistics: Guide for Compilers and Users (2013 EDS Guide) recommends that borrowing for fiscal purposes by the general government through a nonresident entity owned or controlled by government be classified as general government debt and not as Direct Investment: Intercompany lending debt (see paragraph 8 of the Annex 8 in the 2013 EDS Guide).

For additional information on these institutional sectors see paragraphs 6.22–6.24 in BPM6.

General principles of residence are included in Section E, Chapter 4 of BPM6.

Economic territory is explained in Section B, Chapter 4 of BPM6.

Ownership may be direct or indirect, or it may arise because both units are owned by a common investor that is a DI in at least one of the units.

See paragraph 6.19 in BPM6.

For additional information about quasicorporations see paragraphs 4.16–4.17 in BPM6. Types of quasicorporations are discussed in paragraphs 4.26–4.49 in BPM6.

For additional information about multiterritory enterprises see paragraphs 4.41–4.44 in BPM6.

For options on how to prorate, see paragraphs 4.43–4.44 in BPM6.

For additional information about notional resident units, see paragraphs 4.34–4.40 in BPM6.

The only exception is made for land and buildings in extraterritorial enclaves of foreign governments (such as embassies, consulates, and military bases) that are subject to the laws of the home territory and not those of the territory where they are physically situated.

See paragraph 5.26 in BPM6.

Three leases are recognized by the System of National Accounts 2008 (2008 SNA), operational, financial, and resources leases. A resource lease on land may be considered as a sale of the land if the lease satisfies most or all of the same criteria as those listed for payments for a mobile phone license to be considered a sale of an asset, e.g., the owner may allow the resource to be used for an extended period of time in such a way that, in effect, the user controls the use of the resource during this time with little, if any intervention, from the legal owner. See paragraph 17.314 in 2008 SNA.

See paragraph 4.50 in 2008 SNA.

The branch undertakes or intends to undertake production on a significant scale that is based in a territory other than that of its head office for one year or more (see paragraph 4.27 in BPM6) and each branch is a DIENT (see paragraph 4.28 in BPM6).

See paragraph 11.88 in BPM6.

See paragraph 4.47 in BPM6.

See paragraphs 6.33–6.34 for “pass-through” funds and Appendix 4 of the BPM6 Compilation Guide.

See the section Flexible corporate structures with little or no physical presence in Appendix II for a further discussion of these institutional units.

See residence criteria for corporations with little or no physical presence in paragraphs 4.134-4.135 in BPM6.

See paragraph 4.8 in BPM6.

Financial derivatives also should be excluded from direct investment and included instead in financial derivatives (other than reserves) and employee stock options (ESOs).

Other financial corporations include captive financial institutions and money lenders.

These are deposit-taking corporations, MMFs, non-MMFs, hedge funds, and other financial intermediaries, except insurance corporations and pension funds.

See notional resident unit in paragraph 2.10.

For example, real estate brokers or dealers, settlement attorneys, and other intermediaries may be able to provide information that would improve the compilation of data on real estate holdings of households.

See paragraph 6.23 in BPM6.

For SPEs, sources data might be obtained from their legal representative law firms, accounting firms, or tax records (see appendix 4 of the BPM6 CG).

Business taxation records may be an important source of information for compiling an information database in some countries. However, such information may be more focused on operating businesses with employees. Moreover, a survey drawn randomly from such a large dataset could be inefficient in terms of reporting load and public resources due to the large numbers of nil responses from organizations with no international investments. Quality assurance is also difficult for direct investment measures drawn from such records.

Economies are encouraged to adopt the FDIR over time.

A more comprehensive description of the FDIR appears in paragraphs 127-135 in BD4.

More complex cases are provided in BD4, paragraphs 127-145.

Once this group of enterprises is identified, if they reside in the same economy, they may be combined into a LEG

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