For Official Use

COM/DAF/DSTI/RD(2009)2

Organisation de Coopration et de Dveloppement conomiques

Organisation for Economic Co-operation and Development

17-Mar-2009
___________________________________________________________________________________________
English - Or. English
DIRECTORATE FOR FINANCIAL AND ENTERPRISE AFFAIRS
DIRECTORATE FOR SCIENCE, TECHNOLOGY AND INDUSTRY

COM/DAF/DSTI/RD(2009)2
For Official Use
FDI, EXTERNAL FINANCING AND GLOBALISATION A SUPPLEMENTAL PRESENTATION
JOINT SESSION OF THE WORKING GROUP ON INTERNATIONAL INVESTMENT STATISTICS
AND THE WORKING PARTY ON GLOBALISATION OF INDUSTRY
Note by Israel
26-27 March 2009, Paris

This document is circulated for consideration under agenda item 3.

English - Or. English

Contacts:
Ayse Bertrand (DAF): tel. 33 1 4524 9124, e-mail ayse.bertrand@oecd.org
Thomas Hatzichronoglou (DSTI): tel. 33 1 4524 9397, e-mail: thomas.hatzichronoglou@oecd.org
JT03261396
Document complet disponible sur OLIS dans son format d'origine
Complete document available on OLIS in its original format

COM/DAF/DSTI/RD(2009)2
Central Bureau of statistics

FDI, EXTERNAL FINANCING AND GLOBALISATION

A SUPPLEMENTAL PRESENTATION1

Abstract
1.
Foreign Direct Investment (FDI) has been included in one of the four blocks of indicators related
to the activities of MNEs (Multinational Enterprises), as a main part of the recommended statistics on
globalisation, according to the Handbook on Economic Globalisation Indicators, published by the OECD
in 2004. The economic value of direct investments made by parent companies in host countries and by
foreign investors in the domestic economy is one of the main estimators of the extent of globalisation and
several indicators related to FDI have been recommended in the said Handbook.
2.
However, there are additional issues related to FDI, as well as to the capital and debt structure of
MNEs, that deserve treatment.
3.
A supplemental presentation of FDI is suggested in order to have a more complete
understanding of the extent of globalisation and of the composition of total assets and liabilities held and
controlled by domestic enterprises in other economies, as well as by foreign companies in the compiling
economy.
1.

FDI, EXTERNAL FINANCING AND GLOBALISATION

4.
An aspect that may be important but still not included in the globalisation indicators, is that
related to the financing of CA (controlled affiliates) by other means than direct investment. As CAs
develop and expand their activities, financing through domestic banks in the host country or through other
means, can be an alternative to FDI financed by the parent company.
5.
The reasons behind the financing of CAs by FDI or by other means could turn out to be a
complex issue, since many variables are involved including market variables, such as interest and
exchange rates. However, the inclusion of this kind of financing as an additional variable related to
globalisation indicators, may give a further insight into the full extent of investments by parent companies.
6.
In order to clarify this point, lets suppose that a domestic company has a foreign subsidiary,
which is expanding its activities, and/or acquiring an additional company, while the additional financing
1

This document has been prepared by Mr. Shimon Arieli, CBS, Israel. For further information:
ShimonA@cbs.gov.il

COM/DAF/DSTI/RD(2009)2
needed is coming from banks in the host country. Lets suppose also, for the sake of simplicity, that the
market value of the CA abroad is the same as its own funds book value, which equals the direct investment
value of the parent. In this case, neither the own funds book value of the CA nor FDI abroad registered in
the compiling economy have changed at a first stage as a result of the expansion in activities of the
subsidiary. That is because the additional assets have been financed by external sources and not by new
FDI supplied by the parent, so the additional value of assets in the balance sheet of the CA has been
neutralized by a correspondent increase in liabilities, resulting from the new debt. Nevertheless, foreign
assets and liabilities held by the parent company in the CA are not the same as before, despite the fact that
net assets may be the same. This change in assets and liabilities of a CA as a consequence of their
expanded activities may result in a very different level of activities of MNE statistics variables, such as
turnover, output, employment and value added, which won't be reflected in FDI figures. So, if expanding
of CA's abroad turns out to be heavily financed by domestic credit in host countries, then the extent of
globalisation can be measured in a better way by adding indicators based on, for example, the full value of
assets and liabilities of CA's abroad held by parent companies, in addition to net FDI indicators. In
general, this variable would be better related to the level of CA's activities, independently of the financing
scheme adopted by the enterprise.
With respect to CAs of foreign companies in the domestic economy, the full value of assets and
liabilities controlled by foreign parents has to be taken into account, in addition to net FDI in
the compiling country.
7.
Following are some examples that illustrate possible misleading conclusions that may be drawn
from the use of data based on FDI only, when interpreting these data with respect to the changes in the
degree of globalisation of an economy over time and in different economies:
The relative size of FDI stocks and flows in economies, where financing of foreign CA is
based heavily on host countries' funds, as opposed to economies, where this financing is
mainly based on FDI of the parent company, may conduct to misleading conclusions as to the
relative extent of foreign holdings and globalisation of these economies. Economies with the
same FDI may have a very different amount of foreign CA holdings, depending on their
relative utilization of "external financing".
Foreign CA holdings of the same economy may change over time, due to an increasing use of
credits in host countries, for instance, while FDI may remain in a relative similar level. These
changes in holdings won't be registered, if the only estimate of them is changes in FDI.
The relative size of Inward and Outward FDI of an economy, may be different from the
relative amount of foreign CA holdings in the reporting economy and foreign CA holdings of
the reporting economy, depending on the relative use of "external financing" by domestic and
foreign investors. If foreign investors are basing their investments in the reporting economy
mainly on local financing, for instance, while domestic investors abroad are basing
investments mainly on FDI financing, comparison of these investments based only on FDI
amounts (Inward and Outward FDI), may conduct to confusing results.
2.

Consolidated assets and liabilities of CAs

8.
According to accounting rules in many countries, balance sheets of companies include the value
of subsidiaries' assets and liabilities that must be consolidated with parent's ones. As the statistics of
globalisation takes into account investment in foreign CA (subsidiaries abroad), the assets of these latter
companies can be found in total assets of their parents consolidated balance sheet. In order to have an
additional estimate of investments in foreign subsidiaries - besides net FDI and overcome, at least

COM/DAF/DSTI/RD(2009)2
partially, some of the above-mentioned problems, we suggest isolating the value of foreign CA's
consolidated assets and liabilities in parents' balance sheets.
9.
Below is an example of the case in which A is the parent company of a MNE in the compiling
economy and B is a foreign CA of A. For the sake of simplicity, we assume that there are not domestic
subsidiaries.
In
addition,
we
assume
that
A
holds
100%
of
B.
Table 1 presents the original consolidated balance sheet of A, with a breakdown of assets and liabilities
reflecting separately those of the foreign CA (B). Table 2 also presents the consolidated balance sheet of A,
after some expanding of activities has taken place by company B. We assume that new investments of B
amount $500, with an increase of $400 in fixed assets and of $100 in financial assets. We also assume that
the whole investment has been financed by external funds in the same amount of the increase in assets
($500).
Table 1.
Original consolidated balance sheet of A (Breakdown of own funds and consolidated foreign CAs' funds)

Balance sheet of A (consolidated)

$
Liabilities

Assets
Own assets
Fixed assets
Financial assets

2500
500

Total own assets of A

3000

Consolidated assets of foreign

CAs (Company B)
80
20
assets

of

Own funds
Total own liabilities and own funds
of A

1000
2000
3000

Consolidated liabilities
of foreign CAs (Company B)

Fixed assets
Financial assets
Total consolidated
foreign CAs
Total assets

Own liabilities
External financing

100
3100

External financing
Own funds (FDI)
Total consolidated liabilities and
own funds of foreign CAs
Total liabilities

25
75
100
3100

10.
From the above balance sheet of A, we get the consolidated assets of foreign CAs , brokendown in the liabilities' side - by external financing and own funds.
11.
These consolidated assets of foreign CAs are the assets controlled by parent companies abroad
and may be part of a supplemental presentation of FDI, as an indicator of the global development of an
economy.
12.
Of course, as FDI has to be valued in observed and/or estimated market values, the value of
consolidated assets and liabilities of foreign CAs will not equal the value of FDI related to these CAs. We
will return to this point later on.

COM/DAF/DSTI/RD(2009)2
Table 2. Final consolidated balance sheet of A (Breakdown of own funds and consolidated foreign CAs'
funds)

Assets

Balance sheet of A (consolidated)

$
Liabilities

Own assets
Fixed assets
Financial assets

2500
500

Total own assets of A

3000

Consolidated assets of foreign CAs

(Company B)

Own liabilities
External financing
Own funds
Total own liabilities and own
funds of A

1000
2000
3000

Consolidated liabilities
of foreign CAs (Company B)

Fixed assets
Financial assets

480
120

Total consolidated assets of foreign

CAs

600

Total assets

3600

External financing

525

Own funds (FDI)

Total consolidated liabilities
and own funds of foreign
CAs
Total liabilities

75
600
3600

13.
In the above example, the consolidated assets of foreign CAs held by A amounts to $600, from
which $75 have been financed by own funds and are the Direct Investment Position of A abroad. The
remaining assets of foreign CAs, have been financed by external funds in an amount of $525.If we look at
the FDI position abroad of company A, it remains the same $75 after the expansion in activities of
company B, because the new investments have been financed by external funds. However, assets of B
increased from $100 to $500 and this increase may be important in estimating the overall global business
of company A. Looking at net FDI only, may not reveal the additional investments of B.
3.

Additional presentation of FDI in the IIP

14.
Assets and liabilities held abroad by CAs of domestic MNEs' parents and those held in the
compiling economy by affiliates of foreign MNEs' parents, may be incorporated into the presentation of
the IIP.
15.
For the OUT side, the advantage of this presentation is to have a simultaneous look on assets and
liabilities held abroad directly by domestic residents and on those held abroad through controlled affiliates.
For the IN side, we would have assets and liabilities held directly by foreign residents in the compiling
economy and those held though foreign affiliates.
16.
In such a way, we may have a much complete picture of the degree of globalisation of an
economy and of total assets/liabilities held and controlled in other economies.

COM/DAF/DSTI/RD(2009)2
17.
If we would present also the changes in assets and liabilities of subsidiaries abroad as an
extension of the common BOP, these changes together with the changes in other assets and liabilities of
FDI holdings, must summarize
18.
In the general case, assets and liabilities of subsidiaries are consolidated by the parent company
in their whole value, independently of the rate of shares held by the parent. Minority interest is reported in
the consolidated balance sheet of the owing company, reflecting claims on assets belonging to others, noncontrolling shareholders. Of course, the Direct Investment value of the parent in its CAs reflects the own
funds of the CAs, after minority claims have been deducted.
19.
For the additional presentation of IIP suggested here, it seems better to include all assets and
liabilities of CAs as consolidated in the parents balance sheet - while minority claims may be deducted
in the final calculation of the FDI position [see example in item 3.3 (1.2)]. By this way, the presentation
will be also in accordance with AMNE statistics, where the full value of activities performed by
subsidiaries is taken into account and not only the percentage held by the parent company in subsidiaries
shares. This means that companies having control on other companies are in fact in control also of all
their activities. Since these activities are performed with the use of assets held by the companies, all these
assets must be included in the consolidation, as parents also control them.
20.
Following is an example of a presentation of an extended IIP, as is being suggested here. Lets
start with the OUT side (Direct Investment abroad):

Direct Investment abroad

1. Direct Investment in Controlled Affiliates abroad
1.1. Consolidated assets of CAs abroad
1.1.1. Fixed assets
1.1.2. Financial assets
Equity
Bonds and notes
Deposits
Loans
Other financial assets
1.1.3. Other assets
(May include the gap between market value and book value of
CAs abroad)
1.2. Consolidated liabilities of CAs abroad
Equity
Bonds and notes
Loans
Other financial assets
(May include minority claims of non-controlling shareholders)
1.3. Total Direct Investment in Controlled Affiliates abroad
(1.1 1.2)
6

COM/DAF/DSTI/RD(2009)2

2. Direct Investment in Other Affiliates abroad

2.1. Total Direct Investment in Other Affiliates abroad
3. Total Direct Investment abroad (1.3 + 2.1)
Thereof: Other capital
21.

As can be seen above, Direct Investment abroad has been split between:
1) Direct Investment in Controlled Affiliates abroad
and
2) Direct Investment in Other Affiliates abroad

22.
Direct Investment in Controlled Affiliates includes all direct investment abroad of domestic
parent companies in foreign companies, held by the parent in a continuous chain of more than 50%
ownership.
23.
Direct Investment in Other Affiliates includes the rest of direct investment abroad of domestic
parent companies, after Direct Investment in Controlled Affiliates has been deducted from total Direct
Investment abroad.
24.
Direct Investment in Controlled Affiliates has been further split between consolidated assets
and liabilities of CAs abroad (in financial statements of the parents), so it is the difference between these
consolidated assets and liabilities. As Direct Investment is to be valued according to observed and/or
estimated market values, then there may be a need for adjusting the book value of CAs abroad by the
difference between book and market values, which may be included in the consolidated assets of CAs
abroad (See 1.1.3 above).
25.
The presentation (and compilation of data) for the IN side may be much less complicated, as we
only have to show the assets and liabilities of local companies, controlled by foreign residents, for which
financial statements are generally available.

Direct Investment in the compiling economy

1. Direct Investment in Foreign Controlled Affiliates
1.1. Assets of Foreign Controlled Affiliates in the compiling
economy
1.1.1. Fixed assets
1.1.2. Financial assets
Equity
Bonds and notes
Deposits
Loans
Other financial assets
1.1.3. Other assets
(May include the gap between market value and book value of
CAs abroad)

COM/DAF/DSTI/RD(2009)2

1.2. Liabilities of Foreign Controlled Affiliates in the compiling economy

Equity
Bonds and notes
Loans
Other financial assets
(May include minority claims of non-controlling shareholders)
1.3. Total Direct Investment in Controlled Affiliates
in the compiling economy (1.1 1.2)
2. Direct Investment in Other Affiliates in the compiling economy
2.1.Total Direct Investment in Other Affiliates in the compiling economy
3. Total Direct Investment in the compiling economy (1.3 + 2.1)
Thereof: Other capital
4.

Additional presentation of FDI in BOP financial account

26.
Following the suggested additional presentation of FDI in the IIP, a similar supplemental
presentation may be suggested also for the BOP financial account.
5.

Composition of assets and liabilities of foreign CAs

27.
As suggested in previous items, the total consolidated assets and liabilities of foreign CAs in their
parents balance sheet for OUT companies and the assets and liabilities of domestic controlled affiliates
of foreign companies for IN companies - may supply additional indicators on the extent of globalisation
of an economy, in addition to FDI and AMNE indicators.
28.
Moreover, the composition of assets and liabilities of CAs - and not only their total may have
an important role in the overall financial position of MNEs. As activities of MNEs outside their home
economy are increasing, the importance of assets and liabilities held through foreign CA is also rising.
With a more significant share of these holdings - relatively to those held in the home economy or other
assets and liabilities held abroad by the MNE the composition of these assets and/or liabilities will have a
rising influence on the economic behavior of multinationals.
29.
For instance, suppose we have a MNE with foreign CAs having relative high holdings of
financial assets and/or liabilities in the host economies that may be affected by market interest rates. In this
case, changes in interest rates in host economies may have influence on the financial performance of the
whole MNE at home and host economies , on the expanding or contracting of its activities and on its
profitability.
30.
Changes in the value of real estate assets at host CAs economies for having an additional
example may also have influence on the performance of the whole MNE, in cases where these holdings
are relevant. As this kind of assets are in many cases held trough subsidiaries at host economies and
financed there, not the kind of assets held nor their amount will be reflected in FDI statistics.
31.
As a conclusion, information on the composition of assets and liabilities held by CAs in host
economies may be important in order to asses the influence of these assets and liabilities on the financial
position of MNEs. Details on the composition mentioned above would also allow to track changes in time
8

COM/DAF/DSTI/RD(2009)2
and to analyze possible outcomes, in cases of changes in prices and/or other relevant variables in host
economies.
32.
On the liabilities side, the information mentioned will allow to have a breakdown between
financing of CAs by own MNEs funds and by external financing in host economies, as explained above.
Through this breakdown, we can track changes in financing sources and analyze developments over time.
6.

Practical reports difficulties

33.
Corporate reports required for the above breakdown of assets and liabilities may increase the
burden on corporations. The main difficulty arises from the needed breakdown in the balance sheet of the
parent company - between consolidated assets and liabilities of domestic subsidiaries and those of foreign
CAs.
34.
Of course, a much easier solution may be applied for enterprises having only foreign subsidiaries.
In this case, the main figures could be derived from the confrontation of consolidated and non-consolidated
balance sheets.

---------------------------

References
1. Handbook on Economic Globalisation Indicators Preliminary version OECD
2004
2. OECD Benchmark definition of Foreign Direct Investment 4th edition OECD
2008
3. The importance of, and pitfalls in, measuring Globalisation J. Steven
Landefeld and Obie G. Whichard BEA Group of experts in National Accounts
Conference of European statisticians OECD-Eurostat 2006
4. "Manual on Statistics of International Trade in Services" UN, European
Commission, IMF, OECD and WTO 2002