What is foreign direct investment?
Foreign direct investment (FDI) refers to investments by an individual or business (the direct investor) in one economy, with the aim of controlling or influencing the management of a company in another economy (the direct investment enterprise).
A direct investment relationship typically exists when a direct investor acquires or holds 10% or more of the ordinary shares or voting rights in a direct investment enterprise. Once this relationship has been established, any subsequent transaction between the two parties (whether leading to more equity or more debt) is included in the direct investment category.
Foreign direct investment can benefit the recipient economy’s corporate sector in several ways, including sharing knowledge and skills, creating jobs, promoting international trade and providing access to financial markets. For the investor, it can offer better access to commodities, a market for their products and cheaper labour.
How has foreign direct investment changed over the years?
The nature of foreign direct investment has evolved over time.
Factors such as globalisation, increasingly deregulated markets, constant technological and financial innovation and the incorporation of value chains have brought about economic and financial integration, leading to the emergence of large, ever more complex multinational enterprises.
Thus, foreign direct investment is often no longer a one-to-one cross-border relationship, but rather a complex chain relationship. Multiple (direct and indirect) connections can be established between companies looking to cut production costs, optimise their liquidity management, reduce their tax burden and, occasionally, conceal their equity ownership.
Statistics on foreign direct investment seek to reflect how relationships between companies develop.
How is foreign direct investment reported?
Foreign direct investment is reported in accordance with two principles. While the two approaches refer to the same transactions and stocks (with equal net value), they differ in how the data are classified and aggregated.
Under the asset-liability principle, as the name suggests, the data on direct investment are organised by financial assets and liabilities. This means that all financial assets and liabilities created by foreign investment relationships are considered in gross terms.
Under the directional principle, foreign direct investment flows and stocks are classified based on the direction of control or influence. This approach specifically distinguishes between direct investment abroad (outward direct investment) and direct investment in the reporting economy (inward direct investment). Direct investment according to the directional principle has to do with the treatment of reverse direct investment and fellow enterprises (i.e. enterprises controlled directly or indirectly by the same direct investor).
How is the origin of foreign direct investment determined?
Regardless of the approach used for reporting, investments are understood to originate in the country of the immediate investor or counterparty, i.e. the direct holder of the asset in the direct investment enterprise.
Additionally, foreign direct investment statistics by ultimate investor can be used to identify the origin of the investment (i.e. the country of the ultimate counterparty or ultimate investor), and thus identify the investor holding the investment, earning the return and assuming the risk.
The ECB Data Portal provides information based on both the asset-liability and directional principle. Detailed breakdowns by instrument, resident sector and geography of the immediate investor/investee are reported for the asset-liability approach based on the functional categories of the balance of payments and the international investment position.
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