OECD Review of Foreign Direct Investment Statistics of Libya

There are two presentations of FDI statistics: the asset/liability presentation and the directional presentation. Historically, FDI was shown according to the directional principle, which organises the flows and positions according to the direction of investment for the reporting economy—either outward or inward. Therefore, for a particular economy, all flows and positions of direct investors resident in that economy are shown as outward investment, and all flows and positions for direct investment enterprises resident in that economy are shown as inward investment. The presentation of aggregate FDI statistics changed with BPM6 and BD4, both of which recommended that aggregate FDI statistics be shown on an asset/liability basis, which organises FDI statistics according to whether the investment relates to an asset or a liability for the reporting economy. For example, an economy’s assets include equity investment by direct investors resident in that economy in their non-resident direct investment enterprises because those investments are claims that they have on assets in other economies. Similarly, an economy’s liabilities include non-resident direct investors’ equity investment in direct investment enterprises resident in that economy because that investment represents claims that non-resident investors have on assets in the reporting economy. The change to recording aggregate FDI statistics on the asset/liability basis was recommended to make FDI statistics consistent with other macroeconomic statistics in general and with the statistics for other functional categories of investment in the balance of payments and international investment position.

Data presented on a directional basis are better suited to examine the nature and motivations of FDI. The directional principle is the preferred presentation for FDI data broken down by sector and by partner country because it allows for the identification of the main sources and main destinations of FDI. However, under the asset/liability measures, this is not possible because, for example, the acquisition of assets combines both investment by resident parents in their foreign affiliates and loans by resident affiliates to their foreign parents. The directional principle is also helpful for FDI data on an aggregate level, as it sheds light on the motivations behind FDI trends in a timelier manner (as aggregate data are released on a quarterly basis).

The two presentations differ in their treatment of reverse investment and fellow enterprises, which can occur in both equity and debt. Reverse investment occurs when a direct investment enterprise invests in its direct investor. Under the asset/liability presentation, the asset side includes assets of both resident direct investors and of resident direct investment enterprises, and the liability side includes liabilities of both resident direct investors and resident direct investment enterprises. Under the directional presentation, reverse investment is subtracted to derive the amount of total outward or inward investment of the reporting economy. Therefore, if a resident direct investor borrows money from one of its non-resident direct investment enterprises, this is subtracted in calculating the reporting economy’s outward investment because it reduces the amount of money that that economy’s direct investors have invested in their non-resident direct investment enterprises. Similarly, if a resident direct investment enterprise lends money to its non-resident direct investor, this is subtracted when calculating inward investment because it reduces the amount of money that the non-resident direct investor has invested in that economy. While reverse equity investment, i.e., when the direct investment enterprise owns equity shares in its direct investor, is to be treated the same way as reverse debt investment, it is so rare that most of the difference between the two presentations is due to differences in the treatment of reverse debt investment. This was the directional presentation recommended prior to 2008, and it is still useful for identifying the most important sources and destinations for FDI and understanding the motivations of direct investors.

BPM6 and BD4 extended the directional presentation to cover flows and positions between fellow enterprises; this was called the extended directional principle. To reflect the direction and degree of influence exerted by resident and non-resident direct investors in the reporting economy, it is important to recognise that a resident fellow does not achieve any influence over a non-resident fellow if it made a loan to that non-resident fellow—the influence remains with the direct investor common to both fellows. Similarly, a non-resident fellow did not achieve any influence over a resident fellow by extending a loan to it—the influence remained with the direct investor common to the fellows.

Under the extended directional principle, the recording of flows and positions between fellow enterprises in a reporting economy depends on the residence of the ultimate controlling parent (UCP) of the fellow enterprises because it is the UCP that ultimately controls the transactions of the fellows. While this treatment applies to both equity and debt investment between fellows, equity investment is rare, and, therefore, it is debt that has the biggest impact on the statistics. If the UCP of the fellow enterprise is resident in the economy, then loans by and to the fellow enterprise are treated as outward investment. Any loan from a fellow enterprise to a fellow enterprise resident in another economy is treated as an increase in outward investment by the reporting economy because it represents an increase in the influence that a resident direct investor (the UCP) has on the direct investment enterprise in another economy. Similarly, if the fellow enterprise receives a loan, it reduces outward direct investment just as it would if the UCP had received a loan because such investment reduces the total amount the resident direct investor—the UCP—has invested abroad.

If the UCP is not resident in the economy, then flows and positions are treated as inward investment. If the fellow enterprise makes a loan to a fellow in another economy, that is treated as a reduction in inward investment to the reporting economy as funds that flowed into the reporting economy from the non-resident UCP have now flowed to another economy, reducing the amount of foreign direct investment in the reporting economy. It should not be treated as outward investment as making a loan to a fellow enterprise in another economy does not give the resident fellow any influence over the operations of the fellow in the other economy; instead, it is the UCP that still has the influence. If the fellow resident in the reporting economy receives a loan from a fellow in another economy, it increases inward investment as the non-resident UCP’s influence in the reporting economy has increased.

Six classes of direct investment assets and six classes of direct investment liabilities can be defined that will serve as the building blocks for the asset/liability and extended directional presentations of FDI statistics:

• Direct investment assets: (FDI Assets = A1+A2+A3+A4+A5+A6)

  • A1: Equity assets of direct investors in direct investment enterprises

  • A2: Debt instrument assets of direct investors in direct investment enterprises

  • A3: Equity assets of direct investment enterprises in their direct investors (reverse investment)

  • A4: Debt instrument assets of direct investment enterprises in their direct investors (reverse investment)

  • A5: Equity assets in fellow enterprises abroad

    • A5.1: If ultimate controlling parent is resident

    • A5.2: If ultimate controlling parent is non-resident

  • A6: Debt instrument assets in fellow enterprises abroad

    • A6.1: If ultimate controlling parent is resident

    • A6.2: If ultimate controlling parent is non resident

• Direct investment liabilities: (FDI Liabilities = L1+L2+L3+L4+L5+L6)

  • L1: Equity liabilities of direct investment enterprises to direct investors

  • L2: Debt instrument liabilities of direct investment enterprises to direct investors

  • L3: Equity liabilities of direct investor to their direct investment enterprises (reverse investment)

  • L4: Debt instrument liabilities of direct investor to their direct investment enterprises (reverse investment)

  • L5: Equity liabilities to fellow enterprises abroad

    • L5.1: If ultimate controlling parent is non resident

    • L5.2: If ultimate controlling parent is resident

  • L6: Debt instrument liabilities to fellow enterprises abroad

    • L6.1: If ultimate controlling parent is non resident

    • L6.2: If ultimate controlling parent is resident

In the first category, the financing flows in the same direction as the influence or control, from the direct investor to the direct investment enterprise (A1 and A2; L1 and L2). This is in line with the core principle for direct investment that a direct investor acquires influence or control through the provision of financing.

In the second category reverse investment, financing flows in the opposite direction as the influence or control (A3 and A4; L3 and L4). This category reflects the reverse of the standard FDI financing flows as the direct investor uses its influence to have its direct investment enterprises provide equity or debt financing for its own operations. Such investment, defined as reverse investment, is limited to cases where the acquisition of voting power by a direct investment enterprise in its direct investor does not meet the 10% criterion for establishing a separate direct investment relationship in its own right.

The last category shows financing involving fellow enterprises that have no direct investment influence upon one another (i.e., the 10% voting power criterion is not met as there is not sufficient equity ownership in each other) but have a common parent (A5 and A6; L5 and L6). The classes of assets and liabilities in or to fellow enterprises are further subdivided into two sub-classes according to the residence of the ultimate controlling parent (UCP), i.e., the direct investor at the top of the control chain (A5.1, A5.2, A6.1 and A6.2; L5.1, L5.2, L6.1 and L6.2).

These building blocks can be arranged in different presentations suitable for a variety of analytical requirements. Macroeconomic accounts, balance of payments and the national accounts present financial data primarily on an asset and liability basis. Thus, FDI data on this basis are useful when analysing direct investment in relation to other macro-economic variables of the external sector of the economy. In addition, most FDI data are compiled as part of the balance of payments programmes in each country, bridging macro-economic accounts and other presentations of FDI statistics.

To illustrate the asset/liability principle for FDI positions, the six classes presented above are grouped as shown in Table A ‎B.1.

When presenting FDI statistics according to the directional principle, two terms are used: Outward FDI and Inward FDI. Outward FDI includes the net assets of resident enterprises exerting control or influence on non-resident enterprises (net assets of resident direct investors and net assets in fellow enterprises abroad when the UCP is resident). Inward FDI includes the net liabilities of resident enterprises controlled or influenced by non-resident enterprises (net liabilities of resident direct investment enterprises to direct investors and net liabilities to fellow enterprises abroad when the UCP is non-resident). The components of outward and inward FDI are schematically shown in Table A ‎B.2.

• Outward direct investment = A1-L3+A5+A2-L4+A6.1-L6.2

• Inward direct investment = L1-A3+L5.1-A5.2+L2-A4+L6.1-A6.2

FDI asset positions under the asset/liability principle are (generally) greater than FDI outward positions calculated according to the extended directional principle. In the same manner, FDI liability positions under the asset/liability principle are (generally) greater than the FDI inward positions calculated according to the extended directional principle.

For compilers that do not know the residency of the UCP of fellow enterprises or do not cover fellow enterprises in their data collection, they can apply the directional principle by netting reverse investment and treating positions between fellow enterprises according to the asset/liability presentation if they are collected. In this case:

• Outward direct investment = A1-L3+A5+A2-L4+A6

• Inward direct investment = L1-A3+L5+L2-A4+L6

It is important to note that the balance of positions under the asset/liability and the extended directional presentations are the same. The difference between the asset and liability positions is equal to:

(A1+A2+A3+A4+A5+A6) – (L1+L2+L3+L4+L5+L6)

And the difference between the inward and outward positions are:

(A1-L3+A5.1-L5.2+A2-L4+A6.1-L6.2) – (L1–A3+L5.1-A5.2+L2–A4+L6.1-A6.2)

which simplifies to:

(A1 +A2 +A3+A4+A5.1+A5.2+A6.1+A6.2) – (L1+L2+L3+L4+L5.1+L5.2+L6.1+L6.2)

Thus, the net position (outward FDI less inward FDI and assets less liabilities) is the same for both presentations, i.e., the difference between FDI assets and FDI liabilities is equal to the difference between outward FDI and inward FDI.