3.2 Issues with Global Foreign Direct Investment Data

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

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BOX 3.2 Issues with Global Foreign Direct Investment Data (continued)

Thus, investment hubs complicate the identification of true sources of investment, including domestic sources in the case of roundtripping (see box 3.3). Researchers have worked meticulously on individual country data to decipher original sources of investment funds. “Ultimate investor” country data are reported by 14 developed economies. Recent work by Casella (2019) provides a probabilistic estimate of “ultimate investor” bilateral IFDI stock, identifying the actual source country of investors from investment hubs for 2017.

Using the IMF’s CDIS data. The IMF’s Coordinated Direct Investment Survey (CDIS) data (which provide updated bilateral data only on the stock of direct foreign investment) help to discern the state of intraregional investment in South Asia. The data start in 2009 for a sample of 92 (IFDI) and 62 (OFDI) countries and reach a sample of 111 (IFDI) and 80 (OFDI) in 2017. The CDIS also reports mirror data separately, in the same conceptual way that missing-reporter trade data are constructed from trading partner data. That is, missing-reporter outward investment bilateral data may be reconstituted by using inward FDI data from all the counterpart countries. The reporter data and mirror data have had stark differences on occasion (as is common with trade data). Negative values are also reported and reflect disinvestment. The CDIS data are augmented in this report by using a combination of reporter and mirror data. Missing-reporter data or suppressed confidential data are replaced by mirror data whenever possible, and vice versa for missing mirror data (see appendix A for details on data augmentation).c The benchmark OFDI figures are calculated using mirror data supplemented by reporter data when needed because record keeping on IFDI tends to be better than that on OFDI, especially for developing economies. Further, two South Asian countries (Bhutan and Nepal) do not report OFDI data, while two others (Afghanistan and Maldives) do not report any data. In addition, an important hub, the United Arab Emirates, reports neither IFDI nor OFDI data. Thus, mirror data are important for capturing the activities of these countries.d

a. Organisation for Economic Co-operation and Development (OECD) and Eurostat data included bilateral FDI statistics for members of the OECD and the European Union (and some other large middle-income economies). b. The following 38 jurisdictions have made commitments to the OECD on transparency and information exchange for tax purposes: Andorra, Anguilla, Antigua and Barbuda, Aruba, The

Bahamas, Bahrain, Bermuda, Belize, British Virgin Islands, Cayman Islands, Cook Islands, Cyprus,

Dominica, Gibraltar, Grenada, Guernsey, Isle of Man, Jersey, Liberia, Liechtenstein, Malta, Marshall

Islands, Mauritius, Monaco, Monserrat, Nauru, Netherlands Antilles (Curaçao and St. Maarten after 2010), Niue, Panama, Samoa, San Marino, Seychelles, St. Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines, Turks and Caicos Islands, the US Virgin Islands, and Vanuatu. Other localities that have been termed tax havens (Gravelle 2015) include Costa Rica; Hong Kong SAR, China;

Ireland; Luxembourg; Macao; Maldives; the Netherlands; Seychelles; Singapore; Switzerland;

Tonga; and Vanuatu. In 2017, the EU’s list of noncooperative jurisdictions for tax purposes (the blacklist) additionally included American Samoa, Fiji, Guam, Oman, Trinidad and Tobago, the

United Arab Emirates, and the US Virgin Islands. The list is reviewed twice a year, and economies have been removed from the list. The 12 economies on the blacklist at the beginning of 2020 were American Samoa, Cayman Islands, Fiji, Guam, Oman, Palau, Panama, Samoa, Seychelles,

Trinidad and Tobago, US Virgin Islands, and Vanuatu (https://ec.europa.eu/taxation_customs/ tax-common-eu-list_en#heading_0). c. This analysis calculates four augmentations separately: (1) using reporter OFDI data as the base, missing data augmented by mirror data; (2) using mirror OFDI data as the base, missing data augmented by reporter data; (3) using the maximum value when two values are available; and (4) using the minimum value when two values are available. See appendix A for details. d. The downside is that the Afghanistan-Maldives investment relationship is omitted in both directions, as is Bhutanese and Nepali outward investment to Afghanistan and Maldives. However, the values of these four relationships are likely to be very close to zero.