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The problem of Pass-through Funds and Capital in Transit in FDI statistics

This training session addresses interpretation problems with FDI statistics, focusing on pass-through funds and capital in transit. It covers the problems, possible solutions, and their implications for economic analysis.

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The problem of Pass-through Funds and Capital in Transit in FDI statistics

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  1. The problem of Pass-through Funds and Capital in Transit in FDI statistics Gerrit van den Dool MENA Conference, Istanbul, 9 November 2006

  2. Objective and content of this training session Objective Introduction to some interpretation problems with respect to present FDI statistics Content • General overview of problems/possible solutions • More detailed description of the problems • More detailed description of solutions • Conclusion

  3. A. Overview – Problems, possible solutions • The problem: users dissatisfied with current presentation of FDI (many targets, only one bullet) • Solution: additional info/tables for different users • One of the main targets (discussed today): • Problems are caused by several features of current FDI statistics Economically meaningful data on “genuine” FDI

  4. Features of current FDI statistics (1) Outward FDI = assets -/- certain liabilities Inward FDI = liabilities -/- certain assets

  5. Features of current FDI statistics (1)The problem • Some users would like to see non-netted data • Other users would like to extend the netting

  6. Features of current FDI statistics (2) SPE - Established for fiscal or other regulatory advantages Production and employment may be zero

  7. Features of current FDI statistics (2)The problem • Incoming and outgoing positions and flows may be strongly inflated

  8. Features of current FDI statistics (3) • Breakdowns show the country or industry of the direct counterpart (the investor or the investee)

  9. Features of current FDI statistics (3)The problem • Present statistics do not show the ultimate origin or destination of capital many users are interested in

  10. Summary of some major problems How to use financial data in economic analysis? Which part of outward FDIreally reflects the role a country plays in the process of globalisation? Which part of inward FDIreally reflects foreign interest in the reporting economy? FDI figures may have nothing to do with the reporting economy

  11. Tables that could better meet user needs (preview) Aggregates(excl. SPEs) 1a/2a. Outward / Inward (possibly redefined) 1b/2b. Positions ultimately controled by resident UIPs 1c/2c. Positions ultimately controled by non-resident UIPs Breakdown by country and industry Memo items: Total (unadjusted) assets, Assets of SPEs, Total (unadj.) liabilities, Liabilities of SPEs

  12. Conditions to be taken into account Full reconciliation between different presentations (OECD/IMF, SNA) Balance between costs and benefits Costs: reporting burden, resources of compiler Benefits: user can easily find what he wants

  13. B. More detailed discussion of the problems

  14. Inflation of aggregates due to empty shells Assets and liabilities may be distorted by different amounts netting not effective  Exclusion is way out Current problems (1) – Pass-through via SPEs

  15. Special reporting requirements for SPEs Legal framework, special definition Publications: tables excluding and including SPEs Example – The Dutch case

  16. The problem for counterparties of the Netherlands (NL) …

  17. …is far from negligible

  18. Inflation due to treasury centres with resident parents (onlending, liquidity management…) Debt positions between sister companiesnot covered by directional principle  Extend the DP Current problems (2) – Treasury activities

  19. Current problems (3) – Example: a take-over IIP of B Original situation Outward C 500 Inward ------- After take-over(in 1 step) Outward C 500 Inward A 1200 Interpretation problems 

  20. Interpretation issues Outward C 500 Inward A 1200 • FDI economically relevant to B is 700, not 1200 • Role of B as an independent “player” on the world stage is 0, not 500 • A takeover in 2 steps would give different FDI data 

  21. IIP of B Original situation Outward C 500 Inward ------- After take-over(in 1 step) Outward C 500 Inward A 1200 After take-over(in 2 steps) Outward ------- Inward A 700

  22. How to deal with indirect control? Incoming FDI related to activity in B itself: 700 B’s role as an (independent) player in globalisation: 0 This would suggest to net  Outward = 0, Inward = 700

  23. Indirect control may even distort the data of two countries at the same time Inflation of the data of both B and A

  24. Further thorny issues … • What if 1200 represented a greenfield investment? (500 could have been financed later on by portfolio capital) • This would suggest to record Inward = 1200 (Outward = 0)

  25. C. Solutions that have been proposed

  26. Two sisters a1 and a2, same UIP A. Netting debt seems appropriate, but in whose direction? Proposal: let it depend on the controling UIP Extend the Directional Principle

  27. More can be done now: net all intra-company (= same UIP) positions and sort them by UIPs Sort positions by resident/non-resident control

  28. Exclusion of SPEs Extension of the Directional Principle No longer limited to direct links Net amount is no longer just an asset or a liability It now also informs the user about the UIP: Outward = net assetscontroled by resident UIPs Inward = net liabilities controled by non-res. UIPs A proposal

  29. A more detailed comparison of the current and alternative presentations

  30. Present situation - Outward = 2+4+6+8+10+14-3 - Inward = 1+5+7+9+11+13-12

  31. New presentation: three additional dimensions 1. SPE/non-SPE, 2. Res/non-res UIP, 3. Intra/extra-company

  32. Step 1 – Exclude SPEs

  33. Step 2 – Distinguish counterparties by groups and calculate …

  34. … net assets (resident UIP) – Outward net liabilities (non-resident UIPs) – Inward

  35. Step 3 – Classify other minority interests also as inward or outward

  36. Outward = intra-c. + extra-c.(wxyz) = (4+6-3-5) + 2Inward = intra-c.+ extra-c.(wxyz) = (9+11-10-12) +13+1-14(?)

  37. Is the UIP a resident or not? Is the reporting entity an SPE or not? Is the foreign counterparty a subsidiary of the same UIP? Feasibility: “Yes/no” info to be reported

  38. E. Conclusion / summary Current situation - one bullet for different targets The target discussed today: the economic activity perspective; to be hit by Exclusion of SPEs Extension of netting approach (dir. principle) Breakdown by resident/non-resident UIPs Major conditions seem to be met: Full reconciliation with IMF-manual and SNA Additional information remains manageable

  39. Thank you for your attention Gerrit van den Dool

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