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Methods of Data Collection and National Policies in the Treatment of FDI
Foreign exchange records versus company surveys

Very often it is difficult for a country to comply with the recommended definitions and report on all three components of FDI because it relies exclusively on foreign exchange records of the central bank. Thus it is only able to account for capital which crosses its borders and not reinvested earnings. Another approach taken by some countries involves a requirement by the central bank of additional information from foreign investors.

Data on FDI flows are collected primarily for balance-of-payments purposes. However, the data are usually based on the exchange records of the central bank in the framework of the International Transactions Reporting System (ITRS) and are extremely limited in details. Some countries supplement their exchange records data with company surveys or secondary sources. In most cases, that involves a request for information on components of FDI not properly covered in the recording of foreign exchange transactions, the most important of which is reinvested earnings. This generally entails an annual company survey. In some countries, there is also a periodic census or benchmark survey which covers all aspects of FDI and may extend to other related variables. In several cases-such as Australia, Canada and the United States-surveys are the main sources of FDI information.

Very often, however, stock data are not available for countries because of their reliance on the exchange records. Stock data may also be obtained from company surveys. If FDI flows were also obtained on the same basis, then cumulative FDI flows would equal FDI stocks because it would include, for example, changes in valuation due to depreciation. However, where FDI flow data are collected from exchange records and FDI stock data are derived from company surveys, cumulative FDI flows do not generally match stocks. Once again, one major source of discrepancies is that reinvested earnings are excluded from FDI flow data.

Another difficulty is that equity capital, as well as changes in intra-company loans between parents and affiliates, and reinvested earnings tend to fluctuate considerably between years and can be substantially revised. Although there may be attempts to revise the FDI flow-data series accordingly, it can be difficult to attribute revisions to particular previous years. For that reason, proper adjustments are normally made only at the time of comprehensive surveys. Surveys also allow for a revaluation of assets which helps to ensure a more accurate assessment of investment stocks.
Ultimate beneficial owner

As stated above, FDI flow data are likely to be organized on the basis of the immediate host country and immediate investing country, rather than the ultimate host and ultimate investing country. Where funds are channelled through holding companies, major problems may be created in the compilation of an accurate geographical or industrial distribution of FDI. That often leads to an overstatement of investments, particularly in the financial sector, in or from financial centres. The ultimate investment´s origins or intentions of the parent companies are lost as a consequence.

Some countries, however, have made efforts to reduce that problem. Surveys to collect data on FDI stocks can be drawn up in terms of either immediate or ultimate owners. A version of this appears in the German FDI data, where there is a distinction between primary and secondary FDI. Other countries have paid particular attention to trying to resolve the problem of ultimate beneficial ownership, which arises in the case of offshore companies or banks. Those are firms incorporated in countries which are typically offshore banking centres (such as the Netherlands Antilles, Panama, Bermuda or the Cayman Islands) that are not active in the country of incorporation and have their management offices in other countries, generally that of the parent company.

Similar difficulties are encountered in cases of takeovers of firms. If a direct investor is taken over by a foreign firm from a different country, the host country will not always record the change in ownership. If an inward direct investment enterprise owned by a firm in country A is taken over by a firm in country B, the host country should record this as a disinvestment by A and as a direct investment by B; it is recognized, however, that countries do not always have the data to implement that recommendation.

Further problems sometimes arise where takeovers proceed in incremental stages. Early acquisitions are treated as portfolio investment and, consequently, are not included in FDI flows until such time that threshold level is reached. The flow data are not subsequently revised once the threshold level is reached; only the investment which takes the firm over the critical threshold and its following investments are recorded in FDI flows.
Variety of sources for FDI data

Many countries have a variety of sources for FDI data, including those collected by the central bank for balance-of-payments purposes and those collected by the board of investment or a similar institution for monitoring and investment promotion purposes.

Owing to the lack of comprehensive FDI data, especially in some developing economies, it is necessary to draw upon the data provided by institutions responsible for the regulation or promotion of FDI. Allowances must then be made for the regulatory framework within which the data were gathered. For example, not all FDI may have to be registered with the authorities in question; it is possible that reinvested earnings or investments in ventures in which the foreign equity stake is below a certain percentage are excluded.

A typical occurrence is that data provided by those institutions are on approved FDI investments rather than on the investments actually implemented. Sometimes, geographical and sectoral disaggregations of FDI are available only for approved investments. In such cases, data on approved investments provide crucial information, but their limitations must be acknowledged. Normally, approved investments are larger than those actually implemented.
Industrial coverage and classification
Sometimes, the industrial coverage of FDI reporting is limited, or the classification used by national bodies is incompatible with the second revision of the United Nations International Standard Industrial Classification of All Economic Activities. For a few countries, FDI data are highly aggregated in very broad categories. In addition, the industrial classification used may be based on either the primary activity of the parent company, or the primary activity of the affiliate. Exceptions are found in the German and United States FDI data, which are compiled in accordance with both of those criteria. In most countries, outward FDI is classified according to the industry of the parent company, while inward FDI is attributed to the industry of the foreign affiliate in the host economy.
The treatment of banks and other financial institutions
There are particular problems relating to the measurement of FDI in the finance sector. The level of banking activity by local branches may bear little relationship to the assets owned by the parent banks. FDI data sometimes mistakenly include the deposits made by a parent bank in its foreign affiliates. This can give rise to a substantial overestimation of FDI, as the motivation for such deposits may be a response to interest-rate differentials, fiscal changes or political uncertainty. Thus, it is recommended that deposits made by a parent bank in its branches or subsidiaries abroad not be classified as FDI. Similarly, the intra-company flows between affiliated entities engaged in financial intermediation should be excluded from FDI.


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