Historical valuation of FDI
A serious problem stems from the fact that data on FDI stocks usually represent the book value or historical costs of assets. This means that all assets are valued at the prices and exchange rates which prevailed at the time of acquisition. In a company´s book of accounts, investments are recorded in terms of the prices paid at the time they were made and usually expressed in local currency units converted at the then prevailing exchange rate.
This creates major difficulties if inflation or movements of exchange rates become significant. For economies with a significant inward or outward FDI stock established before 1970, the effect of high inflation in the 1970s has been complicated by the impact of dramatic exchange-rate fluctuations in the 1980s. It is not possible to allow for these effects through the normal techniques of price indexing in a given currency, as the FDI data are neither at current nor constant prices and do not reflect a single exchange rate. This implies that cross-country comparisons of FDI data must be treated with caution. The United Nations System of National Accounts, the IMF BPM5 and the Benchmark Definition of OECD recommend market values as the conceptual basis for valuation of stocks. Nevertheless, for practical purposes, OECD recognizes book values from the balance sheets of direct investment enterprises as the only widely available value for the estimation of stocks.
Methods of consolidation
Country rules differ as to how the transactions of the members of an enterprises group are to be consolidated. Foreign affiliates are divided into three categories: subsidiaries, associates and branches. Parent companies in most economies consolidate the accounts of subsidiaries, associates and branches in accordance with national accounting regulations. Such rules may differ from those of the recommended definitions which suggest full consolidation. The reported FDI position of countries which do not adopt the fully consolidated system may be considerably understated.
Capital gains and losses
Some countries include realized capital gains and losses as affiliate income and, consequently, such figures may be represented in their FDI data under the category of reinvested earnings. Until recently, the United States had also included unrealized capital gains and losses in reinvested earnings. That was a major source of difficulty during the 1980s, when substantial exchange-rate fluctuations generated large unrealized capital gains and losses, which led to dramatic fluctuations in the United States FDI flow data. Such movements should be excluded from FDI figures as the changes in the investment position which they bring about are of a portfolio, or purely financial kind, rather than a change in FDI itself.