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Friday, August 02, 2019 /12:43PM / by FDI Intelligence
What is FDI? An Interrogation of Official FDI
Data
Foreign
direct investment is a ubiquitous term used worldwide but what does it actually
mean? The standard answer regurgitates the official OECD/IMF definition, which
is when the direct investor owns at least 10% of the voting power of an
enterprise in another country with the crossborder FDI financial ‘flow’
calculated based on equity investment plus reinvested earnings plus
inter-company loans between parent firms and foreign affiliates.
The
official OECD/IMF definition of FDI is on the one hand very broad, covering all
types of direct investment when there is more than 10% voting power, generally
achieved by owning more than 10% of the equity. The US is the only country in
the world that publishes a breakdown of FDI flows by M&A versus greenfield
FDI and new investment versus expansions; for all other countries the official
FDI flows data does not break down the type of direct investments taking place.
For example, if FDI flows are going up or down in a specific country, we do not
know if this is due to swings in M&A activity or fundamental changes in
location competitiveness and market demand impacting greenfield investment
decisions. Looking at the headline FDI flows and stocks of a country may say
very little about its attractiveness for the types of FDI that have a direct
impact on economic development.
On
the other hand, the OECD/IMF official definition of FDI can be misleading – why
are the Cayman Islands, Luxembourg, Hong Kong and Netherlands among the world’s
leading sources of global FDI? Why did the US have huge negative FDI outflows
in 2018 and Ireland have negative inward FDI in 2018 while FDI flows to the UK
grew strongly despite Brexit? We have seen many governments base FDI strategies
on an analysis of global FDI flows without understanding the methodology behind
the data and the caveats needed. Because Luxembourg is a top 10 global source
of FDI while the US has negative FDI flows does not mean that IPAs should
target Luxembourg for FDI instead of the US. This example is very obvious but
it becomes less obvious when we look at countries such as the Netherlands (a
hotspot for special purpose enterprises – SPEs) or Hong Kong (where due to
‘round tripping’ from China a large chunk of FDI outflows is not really FDI).
How important are they really as a source of FDI?
The
FDI flows data also misses out a significant amount of capital investment being
made by foreign companies as it does not include capital raised locally – which
in some cases can be up to 60% of total project investment value. Official FDI
flows data underestimates the contribution of foreign investors to domestic
capital formation. For countries seeking to attract FDI to increase foreign
exchange earnings, capital being raised locally is of particular concern as it
reduces the potential impact of FDI on foreign exchange.
FDI
flows data is showing the financial flow. While this is very important as a
barometer of capital investment and foreign exchange, for many countries,
regions and cities it is less important than job creation and the other
non-financial benefits that FDI can bring.
The IPA perspective
Alternative
data sources are therefore needed to understand FDI in more detail.
IPAs
acutely recognise this and in fact most national IPAs in developed economies
and most sub-national IPAs across the world do not have targets for attracting
FDI flows; their targets are primarily around the number of greenfield FDI
projects (companies) they attract and around the job creation and increasingly
quality of these investments. These metrics are very different conceptually and
methodologically to the official definition of FDI. Most IPAs are focused on
greenfield FDI and mostly on majority-owned investments, which is a far
narrower definition of FDI than the OECD/IMF 10% rule. Increasingly, IPAs are
also dabbling in supporting M&A and ‘new forms of investment’ (NFI), such
as strategic alliances and partnerships, but this is mostly done on a case-by-case
basis; very few IPAs have targets for attracting and facilitating M&A and
NFI. Indeed, Dubai FDI is the only IPA in the world to
systematically track and publish data on greenfield, M&A and NFI
(see www.dubaifdimonitor.com).
IPAs
also understand that FDI is a relationship not a transaction; it can take
several years of close contact and support of a foreign investor from when they
first express an interest in their location to when they make their full
location assessment and announce they are going to invest. It can then often
take a year or more for the project to actually be implemented due to the
multitude of transactions needed from getting the relevant permits and
licences, to finding and leasing, acquiring or building sites and property, to
signing agreements with utility providers and suppliers, to hiring a workforce.
The actual inward FDI flow emanating from an investment project may only take
place years after the IPA has secured the investment project. The inward FDI flow
may also be staggered based on the phasing of the investment, and capital can
be raised locally so that the full capital investment impact of the investment
may not be captured in the FDI flows data. From the point of view of the IPA it
is a huge success when a company announces its decision to invest in their
location and then a big party when the investor actually opens their
investment. IPAs therefore typically record an investment success at the point
a company announces its investment and they record the capital investment (and
job creation) as the total planned by the investor, which may not be the same
as what is eventually registered as an FDI inflow.
How fDi Markets Helps Plug the Gap in Knowledge
The
flagship annual FDI report of fDi Intelligence (The fDi Report
2019) is based on the fDi Markets database, which was
launched in 2003 and has more than 16 years of time series data.
fDi Markets was
developed to help overcome some of the limitations of official FDI data. It
focuses on greenfield FDI only, which is the type of FDI universally accepted
as having the most direct benefits for economic
development. fDi Markets has tracked 240,000 greenfield FDI
projects creating an estimated $13trn in capital investment and generating more
than 37 million direct jobs.
The
methodology of fDi Markets follows a very similar approach to
that of IPAs – tracking mainly wholly owned foreign subsidiaries, only
investments that create jobs and capital investment, tracking the total amount
of capital investment and jobs planned by the project, and tracking investments
at both the announcement and opening phases. fDi Markets also
addresses a key weakness of much official FDI flows data by recording the real
ultimate parent company for the investment (not an SPE or round tripping) as
well as providing a far deeper sector analysis and sub-national analysis, where
FDI flows data is not published for many countries.
When
reviewing The fDi Report, the reader should be fully
aware of the different definitions and methodologies for measuring FDI as used
by fDi Markets versus official FDI flows data. Certainly, it is
very interesting to compare and contrast official FDI flows data with fDi Markets data
but the caveats and methodological differences mentioned above should be taken
into consideration.
When
reviewing the data and analysis in The fDi Report the
reader should consider the datasets more closely aligned to the FDI accounting
methods used by IPAs rather than the OECD/IMF official method.
The
reader should also be aware of intrinsic limitations of any data tracking
service; it is not possible to track every FDI project – only data that is
publicly available and verifiable as well as data which IPAs are willing to
share can be compiled and published. As companies often do not release the
amount of capital investment or jobs they are
creating, fDi Markets has built-in algorithms that estimate
project size where there are gaps. As every FDI project is unique the estimates
are exactly that – an estimate of what the project size is likely to be based
on other projects in the same sector and country.
While fDi Markets provides
a unique time series dataset and is invaluable for analysing greenfield FDI
trends, as with official FDI data it has its own intrinsic limitations in data
capture and should be seen as the industry-leading barometer of what is
happening in greenfield FDI rather than as a definitive measure of the size of
the FDI market.
Middle East and Africa
Key trends in 2018 include:
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