Box: Note on International Comparability

International guidelines for the compilation of balance of payments and direct investment position data have been set forth by several international organizations. Recently, these guidelines have undergone major revisions, as part of an internationally coordinated effort to modernize and extend international standards for economic accounting and to improve harmonization among the recommendations of different organizations. The BEA data on direct investment discussed in this article conform closely with these guidelines. The data of other countries generally conform less closely, and thus often are not comparable with BEA's data, but efforts to improve conformity are under way in many countries. As a result, the international comparability of direct investment statistics, while incomplete, is improving and should continue to improve as these efforts continue.

The most detailed recommendations specifically pertaining to direct investment appear in the International Monetary Fund's (IMF) Balance of Payments Manual and the Organisation for Economic Co-operation and Development's (OECD) Detailed Benchmark Definition of Foreign Direct Investment; recommendations consistent with these are employed in the external sector of the international System of National Accounts 1993 (SNA)./1/ As now constructed, this body of recommendations provides comprehensive and detailed international standards for recording both positions (stocks) and flows related to direct investment./2/ The recommendations cover a wide range of issues, including concepts and definitions, time of recording, geographical allocation, and valuation.

Direct investment statistics are currently available for roughly 100 countries. However, many of these countries' statistics deviate significantly from international guidelines./3/ One of the most common deviations is the lack of information on reinvested earnings. Although a major source of financing for direct investment—accounting for almost 60 percent of capital outflows for U.S. direct investment abroad in 1994—reinvested earnings are not covered in the statistics of the many countries that must use central bank statistics, rather than survey information obtained from direct investors or their affiliates, as their primary data source. (Unlike equity capital flows or distributions of dividends, reinvested earnings do not give rise to foreign exchange transactions that would flow through the banking system.) Japan and France, for example, are among the many countries lacking information on reinvested earnings. As efforts to improve conformity with international guidelines proceed, perhaps the most important task, as well as one of the most difficult, will be achieving more widespread coverage of reinvested earnings.

Another common deviation is the use of a percentage-ownership threshold different from the recommended 10-percent level for identifying an investment as "direct." For example, the United Kingdom and Germany use a threshold of 20 percent. In addition, some countries do not use ownership percentages as the sole criteria for defining direct investment; instead, they attempt to evaluate individual investments subjectively in determining whether the degree of influence or control is consonant with the general concept of direct investment.

A few other variances from international guidelines may be observed in the statistics of some countries. For instance, some countries exclude certain types of intercompany debt from direct investment, while others may exclude investment in certain industries. Still other countries base their statistics on government approvals of investments rather than on actual flows of funds.

Compared with direct investment balance of payments and position data, financial and operating data for MNC's are much less widely available. In fact, the United States is one of only a very few countries that now produce such data. However, the need for such data is becoming more widely recognized, and several countries are trying to find ways to develop them. Major factors that have heightened interest in these data include the increasing economic interdependence of world economies, the adoption by many companies of global business strategies and internationally integrated production processes, and the increasingly common practice of broadening bilateral and multilateral commercial agreements to cover not only trade issues, as in the past, but also investment issues. Among the financial and operating data items that appear to be of primary interest are intra-firm trade flows and local sales by foreign affiliates (sometimes termed "establishment trade"). Because of the pioneering role of the United States in developing financial and operating data for MNC's, BEA is frequently consulted by national statistical offices and international organizations in connection with attempts to develop such data for other countries.

1. See System of National Accounts 1993 (Brussels/Luxembourg, New York, Paris, and Washington, DC: Commission of the European Communities, IMF, OECD, United Nations, and World Bank, 1993).
2. The new (5th) edition of the IMF Manual is the first to deal with the measurement of stocks of investment; previous editions dealt only with flow items included in balance of payments accounts. This change not only was an improvement in its own right, but it also improved harmonization between the Manual and the SNA. (A major change introduced in the latest revision of the SNA was improved integration in the treatment of stocks and flows.) Other major changes introduced in the revised Manual include provision of more detailed guidance for recording trade in services and transactions involving new and emerging financial instruments.
3. The United Nations recently published a compendium of direct investment statistics worldwide; see United Nations Conference on Trade and Development, World Investment Directory, vol. I–VI (New York: United Nations, 1994). For more detailed information on direct investment definitions used by OECD members, see OECD, "Technical Notes," International Direct Investment Statistics Yearbook 1994 (Paris: OECD, 1994): 266–312.