FDI can be defined and measured in myriad ways. It brings to mind the old Irish joke in which a tourist asks a local man: “What’s the quickest way to Dublin?” After explaining the route the Irishman says: “But I wouldn’t start from here...”
Measures of FDI vary depending on the starting point because the organisations that are doing the measuring are looking for different things: central banks and financial institutions are focused on the value of FDI flows (as they help finance the current account) while economic development organisations are focused on the benefits FDI brings to the national or local economy (in particular job creation).
Also, FDI measures have changed over time as crossborder investment has become more prevalent and high profile. The trend is towards data that is more company- and project-specific and measures benefits for a country's economy. FDI measures may yet develop further as the modes of foreign investment continue to shift, particularly towards providing disaggregated data on joint ventures, strategic alliances and the growing role of sovereign wealth funds.
One topic, two views
The most obvious distinction to consider in FDI data is whether it is ‘greenfield data’ or more general data about ‘FDI flows’ that is being discussed. Consider Italy: looking at the United Nations Conference on Trade and Development's (Unctad’s) World Investment Report 2011, the total FDI flowing into Italy in 2010 was $9.5bn. According to Ernst & Young’s 2011 European Attractiveness Survey, there were 103 FDI projects into the country; two completely different measures. Meanwhile, fDi Markets – a source of greenfield data that is part of the same division of The Financial Times Ltd as fDi Magazine – shows Italy as having received 202 greenfield investment projects totalling $10.76bn in 2010.
Greenfield FDI data looks at the total capital investment of greenfield investments; that is, new or expanded crossborder activities. Official FDI flows data includes greenfield FDI (the proportion which flows across borders) but also other types of FDI, including mergers and acquisitions (M&A), privatisations and equity investments.
Unctad (which uses International Monetary Fund [IMF] and Organisation for Economic Co-operation and Development data) is the main source of data on FDI flows and stocks (the accumulated value of FDI flows). The official definition of FDI focuses on what level of equity a company must have in a foreign entity to give control. According to the IMF, the threshold of what constitutes direct foreign ownership is “10% or more of the ordinary shares or voting power of the entity in the host country”. Most governments use the IMF definition as the basis on which to measure flows of FDI in their balance of payments.
In contrast, fDi Markets and most investment promotion agencies use a much narrower and more specific definition which only measures crossborder greenfield investment projects with a far higher ownership threshold. Henry Loewendahl, an FDI consultant who works on fDi Markets, explains: “we do not follow the 10% rule. Our focus is on greenfield investments which are 100% foreign owned and must directly create jobs in the new or expanded operation.”
Similarly, Ernst & Young’s European Investment Monitor provides FDI data which excludes such items as M&A, portfolio investments, licence agreements and the not-for-profit sector, as it explains in its methodology in compiling data for its survey: “The database tracks FDI projects that have resulted in new facilities and the creation of new jobs… It shows the reality of investment in manufacturing or services operations by foreign companies across [Europe].”
A difference of understanding
Understanding the difference is important because measuring the total flow of capital may include foreign investments, in particular M&A, which, from an economic development point of view, may have limited direct spillover benefits for the host country. The main benefit of FDI flows is helping to finance the current account, which is particularly important for many developing and emerging markets. In contrast, greenfield FDI involves physical projects which, depending on the type of project, has tangible economic development benefits including job creation, creating demand for construction services, technology development, purchasing from local companies, as well as import substitution and export development that also help finance the current account.
The distinction between FDI flows and greenfield FDI is part-historical, part-accounting, as Raul Kharbanda, head of research and customer insight at UK Trade & Investment, the UK’s investment promotion agency, explains: “M&A was such a small amount of the total FDI that historically it was not just taken into consideration. But of course now that is no longer the case. Also, M&A varies widely across the world so if an organisation is trying to analyse and compare data across continents it is much more reliable to exclude the high variants of M&A. By concentrating on greenfield data, the data is arguably more robust.”
Another distinction which derives from the greenfield-versus-flows contrast is about past and future FDI. FDI flows such as Unctad’s figures measure the actual flow of foreign investment which has taken place into the host country in any given year, whereas greenfield FDI data includes projects that have been announced by the company but where the realisation of the investment (and corresponding flow of capital) may take up to several years. Greenfield FDI data is therefore providing an indicator of future FDI flows
Similarly, greenfield FDI data measures the total value of the project, the total investment, even if some of the capital is not, strictly speaking, ‘foreign’ (because funds are raised locally or because the investing company may use different countries through which to flow capital for tax reasons). Unctad estimates that about 50% of capital investment in foreign subsidiaries is raised locally. Traditional IMF-defined FDI flows data does not capture the totality of investment being made by foreign investors.
The wider picture
Greenfield FDI data, because it is disaggregated at the company and project level, provides a greater level of detail than available with FDI flows data. For example, fDi Markets includes data on the cluster, sector and activity of the investment, the origin and location of the investment at a regional and city level, capital investment and job creation, the motives for investment, and export markets served by the investment; and information is provided on the project (for example, how many units of cars are being produced in the new plant) and on the company making the investment, such as turnover. This information enables investors and economic development officials to get a much more detailed picture of the host economy.
Of course, understanding the source of the information is as important as the information itself; one must ask, what is the purpose of the data? Governments and central banks want to get to grips with cash flow and Unctad is interested in the further development of particular economies. Investment promotion agencies may want to analyse data for policy or promotional reasons. Mr Kharbanda says: “The key thing is to let the measures tell you an accurate story… One of the traps for an investment promotion agency is for policy information to be used for promotional ends, and promotional information to be used for policy ends.”
Moving with the times
Definitions are not static, however. They change to adapt to new concerns or new trends. For Unctad, for instance, from a development perspective one of its new concerns is the growth in what it calls ‘non-equity modes of international production and development’, where companies are involved in host countries through such constructs as outsourcing contracts, licensing agreements, franchises and contract farming. This does not come under traditional definitions of FDI flows and Unctad is beginning to focus more on this. Investment promotion agencies are likewise reviewing the FDI definition to consider whether they need to adapt to a changing FDI landscape with the growth of M&A, joint ventures, alliances and sovereign wealth funds – in particular from fast-growing emerging markets.
For investment promotion agencies and private sector intelligence providers, there is a trend towards ever more ‘intelligent intelligence’, breaking down the information into subsets and introducing new tools to analyse it. One particular focus is in assessing the quality of an FDI investment, measuring its strategic importance, whether the investment is an R&D operation (the Slovakian investment promotion agency Sario does this for instance) and the salary levels.
So if a tourist were to ask the same question about Dublin of an FDI analyst, his answer could well be: “Are you sure it’s Dublin you want to go to? Have you thought about visiting Ukraine?”