82 l REGIONAL INVESTMENT PIONEERS IN SOUTH ASIA
BOX 3.2 Issues with Global Foreign Direct Investment Data Making use of global foreign direct investment (FDI) data is complicated. A 10 percent ownership threshold is established for these capital flows, embedding a notion of ownership and control, to distinguish them from foreign portfolio investment. FDI is reported as a flow over a period, as well as a stock reflecting historically accumulated flows at a given time. The most widely used global direct investment data are from the International Monetary Fund’s (IMF’s) balance of payments data on direct investment flows in the IMF International Financial Statistics along with the data on flows and stocks of IFDI and OFDI collected by the United Nations Conference on Trade and Development (UNCTAD). The distinction between IFDI and OFDI relates to the nonresidency and residency of the parent firm, respectively. IFDI (or just FDI) typically refers to investments made by a nonresident parent company (or company with a nonresident parent). OFDI refers to investments abroad made by resident parent firms (see box 3.1). Definitional and classification issues. The definitional issues pose problems in two ways for national data. First, institutional investors could buy more than 10 percent of firm shares but impart no technology or managerial skills that are typically associated with FDI. Second, there is plenty of scope to misclassify investments, as has been well documented for India (Rao and Dhar 2018). Bilateral data availability for developing economies. Bilateral data on developing economies had been absent from the analysis until recently.a Researchers used fDi Markets data (www.fDimarkets.com), owned by the Financial Times newspaper, which compiles bilateral data based on newspaper announcements of investments across borders in various industries. However, the data on investment levels and job creation are based on approvals or pronouncements as opposed to realized outcomes. UNCTAD introduced a bilateral data set that deals with actual flows, but it is available only up to 2012. Prevalence of investment hubs inhibits the understanding of bilateral FDI flows. The issue with even using reliable bilateral FDI flows data from the balance of payments accounts is that the data show only capital movement without information on the final destinations or the original source of investment funds. Multinational firms use strategies that involve indirect routes to investment via investment hubs for various reasons, including tax optimization. A combination of banks, law practices, accounting firms, and other financial specialists design offshore structures for their corporate clients to maximize profits. Investment hubs tend to be low-tax territories with many bilateral preferential tax and investment agreements, and offer sophisticated financial and legal services and strict confidentiality laws. This combination has led them to become avenues for tax and regulatory evasion. (See annex 3A on the role of Mauritius in India’s cross-border investments.) Some have argued that investment hubs offer scope for legitimate tax planning (Hong and Smart 2010), and that the revenue erosion effect is smaller than the efficiency effect of reducing investment entry costs and stimulating investment by more firms (as in the framework in chapter 2). The current thinking appears to be that the tax evasion costs combined with the potential flow of illicit funds require reform in these investment hubs and financial centers, which are sometimes referred to as tax havens. Consequently, many nations have now joined the Organisation for Economic Co-operation and Development’s (OECD’s) Common Reporting Standard and the OECD–G-20 Base Erosion and Profit Shifting initiative.b (Box continues next page)
