The Working Party on the Measurement of International Capital Flows made important use of data reported by selected countries on their direct investment capital flows with partner countries. When compared bilaterally, these geographic data were used to quantify omissions in reported country data.


The Working Party on the Measurement of International Capital Flows made important use of data reported by selected countries on their direct investment capital flows with partner countries. When compared bilaterally, these geographic data were used to quantify omissions in reported country data.

Tables in Chapter 3 and Appendix IV of the Report on the Measurement of International Capital Flows showed significant discrepancies when country data were compared bilaterally. Similar results were found in earlier studies—for example, in a 1985 study by the Netherlands central bank, which compared Dutch and U.S. bilateral direct investment positions, and in a 1990 report by the Statistical Office of the European Communities, which presented bilateral flow data for members of the European Community.1

Such bilateral asymmetries do not necessarily contribute to global imbalances. A particular asymmetry (say, a comparison between the data of country A and country B) may simply reflect differences between the two countries in how they geographically allocate direct investment totals; the asymmetry, therefore, may be offset elsewhere (say, in a comparison between country A and country C).

Despite this possibility, the presentation and analysis of bilateral comparisons were useful for the Working Party’s study because they

  • —revealed inconsistencies in country reports; and

  • —showed the need for interpreting with care many of the Working Party’s adjustments for unreported or incomplete country data.


Separate bilateral comparisons were made for the two components of direct investment capital flows: reinvested earnings and other direct investment (ODI).

For reinvested earnings, data were provided by four major countries—Germany, the Netherlands, the United Kingdom, and the United States (see Table 1).2 In each year, the amounts reported by the four countries as outward investment to the other three countries exceeded the total amounts reported by the four countries as inward investment from the others (see Table 2). The excess was $1.9 billion in 1986 but increased sharply to an annual average of $5.9 billion in 1987 and 1988. These large differences arose after the netting out of many significant positive and negative bilateral discrepancies and may not reflect the full extent of the underlying difference.

Table 1.

Bilateral Comparisons of Reinvestment of Earnings, 1986-88

(In billions of U.S. dollars; outflows (-))

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Source: National tabulations. This table also appears as Table 70 in the Report on Capital Flows.Note: Data reported by the United States exclude capital gains and losses. Data reported by Germany have been moved back one year.
Table 2.

Excess of Bilateral Outward Reinvestment of Earnings over Inward Reinvestment of Earnings Among Four Major Countries, 1986-881

(In billions of U.S. dollars)

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Source: National data shown in Table 1. This table also appears as Table 13 in the Report on Capital Flows.

Negative entries indicate that reported outward investment exceeded reported inward reinvestment.

For ODI capital flows, many more countries compile geographic breakdowns. The bilateral comparisons were extended to include Canada, Australia, and Japan (see Table 3).3 Many significant positive and negative bilateral inconsistencies exist in the figures, but they tended to offset each other in the total for the seven countries. For the 1986-88 period, the annual average bilateral amounts reported by the seven countries as investors were $3.5 billion less than the bilateral amounts reported by the seven countries as hosts (see Table 4).

Table 3.

Bilateral Comparisons of Other Direct Investment Capital Flows, 1986-88

(In billions of U.S. dollars; outflows (-))

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Source: National tabulations.Note: Totals exclude pairs where data from only one side are available, or where data are not available for all three years.
Table 4.

Bilateral ODI Outflows Compared with Inflows Among Seven Countries, 1986-881

(In billions of U.S. dollars)

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Source: National data shown in Table 3.

Negative entries indicate that reported outflows exceed inflows.

Neil Patterson was a member of the technical staff. He is now a Deputy Division Chief in the IMF’s Statistics Department.

Practices That Contribute to Bilateral Discrepancies

Bilateral discrepancies in data arise because of differences between countries in definitions, classifications, coverage, sources, and compilation methods. The differences are of two types: (1) those that affect the measurement of direct investment totals, and therefore contribute to the global direct investment discrepancy, and (2) those that are related only to the allocation of transactions by partner country. The latter type affects bilateral comparisons but not the global discrepancy.

Particular differences in national practices that may contribute to the bilateral discrepancies are discussed in the following paragraphs. These national practices are compared with international standards as specified in the Fund’s Balance of Payments Manual (fourth edition) and elaborated in the OECD’s “Benchmark Definition.”4

Calculation of Reinvested Earnings

According to international standards, reinvested earnings on direct investment cover the unremitted earnings of unincorporated direct investment enterprises (including branches) as well as the direct investor’s share of the earnings of incorporated enterprises that are not formally distributed. These earnings are conceived of as providing additional capital to the direct investment enterprises. In recording such earnings in the balance of payments, therefore, entries should be made for both direct investment income (in the current account) and direct investment capital (in the capital account). The entries should be the same size and offsetting. In the capital account, they are described as “reinvestment of earnings.” These earnings should be recorded in the period that they are earned and should be calculated net of taxes, depreciation, and capital gains and losses.

In practice, these standards are used flexibly. Of the seven countries addressed in this paper, only four include reinvested earnings on direct investment in the current account and also record an offsetting amount in the capital account. The Netherlands does not include reinvested earnings in its national balance of payments statistics but compiles the data in supplementary tables.

Among the five countries compiling reinvested earnings data, country practices differ. For example.

  • —The United States includes realized and unrealized capital gains and losses in its reinvested earnings data. Other countries often exclude unrealized gains and losses. (However, the United States publishes separate data on these gains and losses, and the U.S. data shown in Table 1 and Table 2 are adjusted to exclude them.)

  • —Germany records reinvested profits in the year after they are earned. Other countries record them when earned. (The German data shown in Table 1 and Table 2 include an adjustment to put them on a comparable timing basis with those of other countries.)

Components of Direct Investment Capital Flows

According to international standards, direct investment capital flows cover all capital transactions between enterprises in a direct investment relationship.5 These flows include equity investment, reinvested earnings, and “intercompany debt”—such as trade credit and other loans—whether long or short term. The flows encompass so-called reverse transactions, such as equity investments by affiliates in their direct investors and loans extended by affiliates to their parents. In the case of reverse transactions, international standards state that they should be regarded as disinvestment by the parent in the affiliate (that is, negative outward investment from the parent’s country) rather than as investment by the affiliate in the parent (inward investment to the parent’s country). Furthermore, the inclusion of reverse transactions in direct investment should apply even if the affiliate has little contact with the real economy of its host country and has been set up purely to raise capital or channel funds to its parent. In such cases, the finance affiliate may be issuing bonds in international markets or receiving loans from unaffiliated enterprises in a third country (portfolio or other investment transactions) before transferring the proceeds to its parent (a direct investment transaction).

However, there are deviations from these standards among the countries listed in the tables. The following deviations may contribute most to bilateral discrepancies.

  • —Germany, Canada, and Japan define direct investment to exclude short-term loans and other short-term credits.

  • —Germany and Japan exclude all reverse loans from their statistics on direct investment.

  • —Australia and Canada attempt to “look through” loans extended by foreign finance affiliates set up purely to raise and channel funds to their parents; they do not regard these loans as direct investment.

  • —The Netherlands treats reverse loans as investment by the affiliate in the parent.

  • —The direct investment statistics of the Netherlands exclude the transactions of special financial institutions (SFls). Established in the Netherlands, SFIs are foreign-owned holding or finance companies that raise funds abroad for re-lending abroad.

Definition of Direct Investment Enterprise

According to international standards, the statistics should cover all enterprises in which an investor has a direct investment interest. Once an “across-the-border” direct investment of 10 percent is achieved with enterprise A, certain other enterprises related “down the line” to enterprise A will also be regarded as direct investment enterprises. Direct investment measurement should cover all transactions between the direct investor and enterprise A and certain of its affiliates (and between the affiliates if they are in different countries).

In its “Benchmark Definition,” the OECD provides a detailed and precise definition of the affiliates that should be covered; this definition—described as the “fully consolidated system”—is too detailed to describe in full. In brief, however, the benchmark definition states that if indirectly owned enterprises are excluded from a country’s definition of direct investment enterprises, reinvested earnings can be greatly understated. The definition also states that if indirectly owned enterprises are excluded, some ODI capital flows may be omitted from direct investment statistics. The definition adds that, on the whole, the omitted flows will be small because most ODI flows are between the investor and its directly owned concerns.

All seven countries in Table 3 and Table 4 take some account of capital flows among indirectly connected enterprises. However, the coverage of indirectly owned enterprises varies considerably among the countries. Some—including the United States, Canada, Australia, and the United Kingdom—take extensive account of indirectly owned enterprises; others—especially Germany—cover them less comprehensively.

Classification of Direct Investment by Country

According to international standards, changes in claims and liabilities should be allocated to the country where the foreign debtor or creditor is a resident. Similarly, earnings should be allocated to the country in which they were made. In the case of direct investment statistics, this practice can be construed as allocating outward direct investment to the residence of the direct investment enterprise and inward direct investment to the residence of the direct investor. Take, for example, an investor in country M who takes over the capital of an enterprise in country N from a foreigner in country 0. When country M compiles its statistics, the transactions should be allocated to country N and not to country O, even though the seller is located in country O and the funds may be sent there. Of the seven countries, all except Canada and Japan follow this general principle.

The presence of indirectly held enterprises can complicate this accounting process. For example, what should be done if a U.S. company directly owns a company in the United Kingdom that, in turn, owns another company in Germany? Should the United States in its statistics on outward reinvested earnings allocate the earnings of the indirectly held enterprise in Germany to that country or combine them with those of the directly held enterprise in the United Kingdom and allocate them all to that country. Moreover, should Germany in its statistics on inward reinvested earnings allocate those of the German company to the immediate direct investor in the United Kingdom or to the ultimate investor in the United States?6 Further complications occur if the U.K. company is not wholly owned by the U.S. investor.

For reinvested earnings, comparability can be achieved among the three countries if Germany allocates its inward earnings to the United Kingdom and if the United Kingdom treats them as outward earnings from Germany, then combines them with those of the directly owned company in the United Kingdom, and ultimately shows them as inward earnings to the United States. The United States, for its part, treats the combined earnings of its German and U.K. companies as outward earnings from the United Kingdom. This is the method recommended by the benchmark definition.7

Although some countries follow the system recommended in the benchmark definition, others do not. For example, the United States and Australia allocate, as recommended, reinvested earnings to the immediate host or investing country. On the other hand, the United Kingdom requests companies to supply information for each country in which they make direct investment earnings. However, some U.K. companies do not have full information on each of their indirectly held concerns, because they collect only consolidated accounting data from each of their directly owned overseas affiliates. These data cover indistinguishably that company and all its affiliates. In such cases, earnings are allocated as recommended in the benchmark definition. The same applies to inward earnings in a U.K. company that may be attributed to the country of the intervening affiliate. The Netherlands data are usually allocated as recommended, but some earnings are allocated to the country of each indirectly connected concern. Germany does not cover the reinvested earnings of indirectly owned enterprises. These different treatments may distort bilateral comparisons among the seven countries when a party to the comparison is the host to intermediate holding companies. For example, inconsistencies have occurred in the treatment of certain jointly owned enterprises in the statistics of the Netherlands and the United Kingdom and in the countries in which these enterprises have investments.

For outward investment, ODI capital flows should be allocated to the country location of each foreign affiliate with which the transaction occurs, whether the affiliate is directly or indirectly owned. For inward investment, the flows should be attributed to the country of each member of the foreign parent group that engages in the transaction.8 All seven countries follow this approach, although consolidation sometimes occurs at the level of the intervening affiliate. Because such consolidation occurs in U.K. company reporting, for example, the importance of a few countries in which intermediate holding companies are located, such as the Netherlands, may be “overstated” in the U.K. statistics when compared with other countries.

Coverage, Data Sources, and Methods

Discrepancies in bilateral data may also arise from imperfections in the way that compilation systems cover transactors or transactions, from errors in data reported to statistical agencies, or from relative strengths and weaknesses in compilation procedures. These kinds of discrepancies occur among the seven countries even though the quality of their collection systems is generally high.

Concluding Comment

The Working Party’s Report on Capital Flows shows that national data on the geographic details of direct investment capital flows are particularly useful in detecting and quantifying gaps and discrepancies in balance of payments statistics. The Working Party urged national compilers to prepare and exchange these data and stressed that the statistics should be prepared according to the recommendations of the Manual. Widespread differences exist among countries in how they prepare geographic data. Clearly, national compilers have much to do to align their data with international standards and make more useful exchanges.