8. Foreign Direct Investment THE CONTRACTOR IS ACTING UNDER A FRAMEWORK CONTRACT CONCLUDED WITH THE COMMISSION

Definition of FDI?

DI Definitions Set out in BPM6 and BD4 “FDI arises when an investor resident in one economy makes an investment that gives control or a significant degree of influence (“lasting interest” in BPM6) on the management of an enterprise that is resident in another economy.” 10% threshold between FDI and Portfolio Investment. Not based on approvals (may never happen).

DI Definitions (2) The controlling enterprise in the direct investor Enterprises under control is the DI Enterprise (DIE) Fellow enterprises – two enterprises with the same direct investor, but neither have a direct investment in each other. BPM6 requires any transactions between fellow enterprises to be recorded.

DI - terminology DIE comprise: Branches (An unincorporated enterprise in the host country that is a permanent establishment or office of a foreign direct investor) Subsidiaries (direct investor owns more than 50% - control) Associates (between 10 and 50% - influence) Enterprises in a direct investment relationship are called affiliates.

Framework for DI Relationships DI relationship when: Immediate subsidiary Immediate associate Subsidiary of a subsidiary Subsidiary of an associate Associate of a subsidiary However, no DI relationship exists if: Associate of an associate (influence over management too diluted to be significant)

Who can be a direct investor? Enterprises (private and public) Investment fund (BPM6 para 6.30), trust, trustee etc. Governments (6.22). NPISH (6.23) Households (or some combination if in same group and economy as each other)

Special cases Quasi-corporations Offshore enterprises Produce goods and services (at least 1 year) in another economy but do not establish a separate legal unit e.g. construction company. Offshore enterprises Such as processing companies. Residency based on where enterprise operates. Special Purpose Entities (SPEs) Located in a different economy, but with limited local transactions. SPEs defined by structure and purpose.

Special cases (2) Financial intermediaries Transactions between affiliated financial intermediaries should be excluded (apart from equity transactions). Purchases/sales of land by non-residents Assume ownership is transferred to a resident notional unit, deemed to own the land/building. Resident unit is treated as a DIE. Natural resource exploration Treat expenditure on exploration as equity investment.

Special cases (3) Round tripping Pass through or funds in transit Funds from one economy passes through a second economy and then back into another entity in the original economy (perhaps for tax reasons). Pass through or funds in transit Like round tripping but into a third economy. If important present as a supplementary item.

Presentation - standard Standard components classify FDI according to relationship: Investment by a DI in its DIE Reverse investment by a DIE in its DI Investment between resident and non-resident fellows.

Presentation – directional principle Direct investment abroad (outward). Include assets and liabilities between fellow enterprises where the ultimate controlling parent is resident. Direct investment in the reporting economy (inward). Include assets and liabilities between fellow enterprises where the ultimate controlling parent is non-resident NOTE: if not possible to identify residence of ultimate parent, assets are treated as DI abroad and liabilities treated as DI in reporting economy.

Vademecum – FDI Flows, levels and income Instrument: equity, debt, RIE Activity breakdown Partner country breakdown Asset/liability and directional principle (inward/outward).

Sources Registers of Direct investors and DIE needed. Ownership may be determined by national Business Register. Approvals information may help to identify inward investment. Detailed data usually collected via surveys.