The definition and measurement of FDI

Generally speaking, the concept of FDI refers to the setting up of an overseas
operation (greenfield investment) or the acquisition of an existing enterprise
located within another economy. FDI implies that the investor exerts
a significant degree of influence on the management of the enterprise resident
in the host country. The management dimension is what distinguishes
FDI from other forms of investment such as foreign portfolio investment
(FPI), which includes equity and debt securities, and financial derivatives.
A closer look at the concept of FDI, however, reveals that, partly due to
the complex nature of this phenomenon, its definition has changed considerably
over time. One of the earliest definitions can be found in the 1937
inward investment survey conducted by the US Department of Commerce,
which aimed to measure ‘all foreign equity interests in those American corporations
or enterprises which are controlled by a person or group of persons…
domiciled in a foreign country’ (US Department of Commerce, 1937,
p. 10). No specific definition of ‘control’ was provided in this report,
although control was the main criterion for the foreign inward investment
classification. In the subsequent survey of outward investment, ‘the United
States equity in controlled foreign business enterprises’ (US Department of
Commerce, 1953, p. 4), control was explicitly defined on the basis of four
investment categories, only some of which would still constitute measures
of FDI.

As noted by Lipsey (1999), the current definition of FDI, as endorsed by
the IMF (1993) and the OECD (1996), seems to have shifted its emphasis
away from the idea of ‘control’, toward a ‘much vaguer concept’ (Lipsey,
1999, p. 310) of ‘lasting interest’. According to this new benchmark definition,
FDI ‘reflects the objective of obtaining a lasting interest by a resident
entity in one country (“direct investor”) in an entity resident in an economy
other than that of the investor (“direct investment enterprise”). The
lasting interest implies the existence of a long-term relationship between the
direct investor and the enterprise and a significant degree of influence on
the management of the enterprise’ (OECD, 1996, pp. 7–8).

In spite of the efforts of international agencies to push for uniformity, it
is important to acknowledge that definitions and measurements of FDI
still differ among countries. Indeed, different countries often have diverse conventions as to what constitutes ownership of a company from the point
of view of the management of its assets. For example, while in the USA an
equity capital stake of 10 per cent of shares would suffice to indicate foreign
ownership, in the UK a stake of 20 per cent or more would be regarded as a
more appropriate indicative threshold. Most importantly, there are serious
practical difficulties in the compilation of FDI data, particularly in the case
of developing countries which often lack the necessary technology and systems
to collect such data on a systematic basis. For this reason, even
UNCTAD’s World Investment Reports often contain statistics derived through
the use of proxies. It is due to this kind of problem that published FDI statistics
of most countries, but particularly the developing ones, are subject to
considerable errors and omissions. This also explains why reported data on
FDI inflows and outflows, that should theoretically be equal to each other,
always tend to show discrepancies.
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