Definition of Direct Investment Course on Balance of Payments and

1. Definition of Direct Investment Course on Balance of Payments and International Investment Position Manual (BPM6) IMF-PFTAC Nadi November 22-December 1, 2010 BP09

2. Introduction • Recall • Direct investment is • related to control or a significant degree of influence, and tends to be associated with a lasting relationship • Direct investor may supply • Funds, knowhow, technology, management, and marketing • Enterprises in a direct investment relationship • are more likely to trade with and finance each other

3. Definition of direct investment • Direct investment relationship, (DIE and DI) • Control and significance influence • Immediate and indirect relationships • Transmission of control and influence • Subsidiaries, associates, fellow enterprises • Control, influence & voting power

4. Direct investment relationship • A direct investment relationship • an investor resident in one economy makes an investment that gives control or a significant degree of influence on the management of an enterprise that is resident in another economy • A direct investor • is an entity or group of related entities able to • exercise control or a significant degree of influence • over another entity that is resident of a different economy

5. Direct investment relationship Cont. • A direct investment enterprise is an entity subject to control or a significant degree of influence by a direct investor • In some cases, a single entity may be, at the same time, a direct investor, a direct investment enterprise, and a fellow enterprise in its relationships to other enterprises

6. Control and significance influence • Control or influence may be achieved directly by owning equity that gives voting power in the enterprise, or • Indirectly through having voting power in another enterprise that has voting power in the enterprise • Accordingly, two ways of having control or influence are identified

7. Immediate and indirect relationships • Immediate direct investment relationships • direct investor directly owns equity that entitles it to 10 per cent or more of the voting power in the direct investment enterprise • Control is determined to exist if the direct investor owns more than 50 per cent of the voting power in the direct investment enterprise • A significant degree of influence is determined to exist if the direct investor owns from 10 to 50 percent of the voting power in the direct investment enterprise

8. Immediate and indirect relationships Cont. • Indirect direct investmentrelationships • Indirect direct investmentrelationships • through owning of voting power in one direct investment enterprise that owns voting power in another enterprise or enterprises • i.e., an entity is able to exercise indirect control or influence through a chain of direct investment relationships

9. Transmission of control and influence • Principles for indirect transmission of control and influence through a chain of ownership • Control can be passed down a chain of ownership as long as control exists at each stage • Influence can be generated at any point down a chain of control • Influence can only be passed through a chain of control but not beyond

10. Subsidiaries, associates, fellow enterprises • A subsidiary is a direct investment enterprise over which the direct investor is able to exercise control • An associate is a direct investment enterprise over which the direct investor is able to exercise a significant degree of influence, but not control • Fellow enterprises are those which are both under the control or influence of the same direct investor

12. Control, influence & voting power • Control or influence - voting power • Voting power is not recognized if temporary • obtained through repurchase agreements (because no change in the economic ownership) • through the holding of warrants (holder does not possess voting power until the warrants are exercised) • Voting power may be direct or indirect

13. Relationships - not constituting DI • Representation on the board of directors • A common board of directors • Participation in policy-making processes • Material inter-company transactions • Interchange of managerial personnel • Provision of technical information • Provision of long-term loans at lower than existing market rates

14. Who might be a direct investor? • an individual or household • an enterprise, incorporated or unincorporated, public or private • an investment fund, a government or international organization • a nonprofit institution in an enterprise that operates for profit . However, the relationship between two nonprofit institutions is excluded from direct investment • an estate, trustee in bankruptcy, or other trust, or any combination of two or more of the above

15. Changes to BPM5 • The Framework for Direct Investment Relationships (FDIR) adopted • Ownership of ordinary shares replaced by ownership of equity that gives rise to voting power • The relationships due to indirect voting power and fellow enterprises is elaborated • Insurance technical reserves are potentially included in direct investment