FOREIGN DIRECT INVESTMENT (FDI)

Transcription

1 FOREIGN DIRECT INVESTMENT (FDI) FLOWS, STOCKS AND INCOME An overview of French sources, methods and data DGS - Directorate General Statistics DESS - Surveys and Sectoral Statistics Directorate SID - Direct Investment Division July 212 1

2 FDI flows components (1/3) FDI flows correspond to a functional breakdown of the Balance of Payment s financial account. As such, transactions are recorded at market value and released monthly. They are divided into two directional categories, French DI abroad and Foreign DI in France. Each category is divided into three subcomponents: Equity capital transactions, among which real estate transactions Reinvested earnings Other capital transactions (intercompany loans) 2

3 FDI flows components (2/3) Equity capital transactions in French DI abroad comprise all transactions by which French resident investors acquire 1% or more of the ordinary shares of non resident companies, bought or created, increase their capital holding of non resident companies provided they hold at least 1% of the capital after the transaction, and provide capital to non resident branches Individuals, enterprises, groups of individuals or enterprises, government agencies, trusts, funds or other organizations which provide capital are called Direct Investors. Entities receiving capital are called Direct Investment Enterprises (DIE). DIE can be subsidiaries, affiliates or branches Equity capital also include real estate transactions: purchase or sale of real estate goods by individuals or companies for their personal or professional use 3

4 FDI flows components (3/3) Reinvested earnings are the Direct Investor s share of earnings not distributed as dividends by subsidiaries and affiliates and earnings of branches not paid to the Direct Investor Other capital transactions (intercompany loans) comprise lending and borrowing between Direct Investors and DIE. They also include lending and borrowing between enterprises located in different countries without any direct financial link as long as they belong to the same international group (fellow enterprises) According to the IMF Balance of Payments manual (BPM5), debt securities issued by enterprises and bought by affiliates belonging to the same international group like trade credits between affiliates should also be included in Direct Investment other capital transactions. But, in the French case and for the time being, such transactions are not distinct from other debt security and trade credit transactions and are therefore recorded under other Balance of Payment s items 4

5 FDI flows sources in use (1/3) For the compiling of FDI flows the main sources in use at the Banque de France are: The reporting by resident Direct Reporting Companies (DRCs). DRCs are commercial and industrial companies carrying out international transactions in services and income for more than EUR 3 million in a year. From the moment their transactions in services and income are above the threshold, they have to report all their transactions to the Banque de France on a monthly basis The reporting by banks. Banks report their own transactions on a monthly or yearly basis to the Banque de France 5

6 FDI flows sources in use (2/3) The Caisse des Dépôts et Consignations, a State owned company, reports monthly the real estate transactions between residents and non-residents A new quarterly survey has been implemented in the second half of 211, in order to collect data on other capital stocks from large companies. Quarterly transactions are calculated from stocks We also use FDI watching to supplement the data collecting system: financial press reading, website of the Financial Markets Authority and other internet websites, database on Mergers & Acquisitions, database of the Banking Commission, data exchange with other national central banks or with national statistical institutes of European Union countries 6

7 FDI flows sources in use (3/3) Regarding more specifically FDI flows, there is a complementary source: Reporting forms for real estate and equity capital transactions, which are mandatory for every transaction higher than EUR 15 billion They are available on the Banque de France s website and must be transmitted to the Direct Investment Division during the 2 working days following the transaction 7

8 French Direct Investment abroad detailed flows (in sign of position) 2 (in bn) 2 18 Equity Real estate Reinvested earnings Other capital Outward FDI

9 Foreign Direct Investment in France detailed flows 8 8 (in bn) Equity Real estate Reinvested earnings Other capital Inward FDI

10 Net FDI flows contribution to the French balance of payments financial account (in bn) Outward FDI Inward FDI Net FDI flows (Inward - Outward)

11 The extended directional principle (1/2) At the moment, regarding intercompany loans, most assets are recorded among French Direct Investment abroad and most liabilities are recorded among Foreign Direct Investment in France Following the creation and the development of special purpose entities (SPEs) abroad that specialize in financing or cash pooling within international groups, this way of recording artificially inflates inward and outward FDI flows This is why the 28 edition of the OECD Benchmark Definition of FDI (BD4) recommends disseminating data that are corrected for such flows The general rule for correcting data is to use the directional principle for all loans between fellow enterprises (meaning entities belonging to the same international group with no direct ownership links involving 1% or more of equity capital between them) 11

12 The extended directional principle (2/2) The classification on the basis of the extended Directional Principle (ex-dp) respects the following rule: lending and borrowing between resident entities of a resident group and foreign fellow enterprises must be recorded as outward FDI and, conversely, lending and borrowing between resident entities belonging to non resident groups and foreign fellow enterprises must be recorded as inward FDI To be able to make such a classification, it is necessary to identify groups of enterprises operating in France, to know the country of residence of their Ultimate Controlling Parent (UCP) and to define their outline. We are able to do all, thanks to the survey Liaisons Financières, LiFi ( Financial Links ) carried out by the French statistical institute, INSEE As agreed between Member states and European institutions, the ex-dp should be implemented by all the EU member States in 214 Statistics calculated following the ex-dp rule can be broken down by counterpart country and by sector. But in certain cases stocks may become negative 12

13 France s foreign direct investment flows in the conventional presentation and under the extended directional principle (ex-dp) from 28 to 211 EUR billion FDI abroad traditional presentation (I)+(II)+(IIIa) 15,8 77,1 58, 64,8 FDI abroad ex-dp (I)+(II)+(IIIb) 78,3 63,8 5,1 61,9 Equity capital (I) 58,9 38,3 26,1 21,1 Reinvested earnings (II) 7,7 11,7 19,3 27,2 Other capital - traditional presentation (IIIa) 39,2 27,1 12,6 16,6 Other capital ex-dp (IIIb) 11,6 13,9 4,7 13,6 FDI in France traditional presentation (I)+(II)+(IIIa) 43,8 17,4 23,1 29,5 FDI in France ex-dp (I)+(II)+(IIIb) 16,3 4,2 15,2 26,5 Equity capital (I) 15, 14,5 11,6 12,1 Reinvested earnings (II) 1,8-2,3 5,1 7, Other capital - traditional presentation (IIIa) 27, 5,3 6,4 1,3 Other capital ex-dp (IIIb) -,6-7,9-1,5 7,4 Net balance (FDI in France FDI abroad) -62, -59,7-34,9-35,4 13

14 FDI flows abroad Traditional presentation Extended directional principle in bn

15 FDI flows in France Traditional presentation Extended directional principle in bn

16 FDI stocks components FDI stocks are compiled at the end of each year. There are also quarterly estimates. Like flows, they are divided into two directional categories, French DI abroad and Foreign DI in France. Each of these two categories is classified into three subcomponents : Equity capital stocks Real estate stocks Intercompany loans 16

17 FDI stocks sources in use (1/2) For the building of stocks the main sources are: Affiliates and Subsidiaries equity capital An annual survey (called «enquête IDFE») on French Direct Investors: this survey, which only takes into account affiliates and subsidiaries located abroad and directly controlled or invested by resident companies, provides us with data about own funds of non resident affiliates and the capital s share held by French investors, and also data on income, reserves and distributed income of the affiliate s last annual exercises Data collection on balance-sheet and profit and loss account: we collect the same annual data on resident companies directly controlled or invested by non residents from Banque de France s internal databases and from an INSEE s database Without any specific collecting system, real estate stocks are estimated by cumulating flows Collected data are valued at book value (the own funds at book value come from affiliates and subsidiaries' statement of liabilities) 17

18 FDI stocks sources in use (2/2) Intercompany loans Up to 21, data were based on an annual mandatory survey, known as «Etat 9», which aimed at collecting the stocks on financial assets and liabilities closed on December, 31 st, except bonds and trade credits, of resident insurance and non financial companies vis-à-vis foreign companies. All resident companies of which stocks of financial assets and liabilities visà-vis foreign companies were higher than 1 million were subjected to the survey. Once surveyed, resident enterprises had to report their financial assets and liabilities to the Banque de France, split into intercompany loans and borrowing (which contribute to the direct investment position) and other assets and liabilities (which contribute to the other investment position) From the second half of 211, data are collected through a new quarterly survey for companies with assets or liabilities higher than 5 million, and annually for companies with assets or liabilities between 1 million and 5 million 18

19 125 Outward FDI stock at own funds at book value in bn Equity at own funds at book value Real estate at book value Other capital

20 1 Inward FDI stock at own funds at book value in bn 8 Equity at own funds at book value Real estate at book value Other capital

21 Valuation of FDI positions at market value (1/3) FDI equity capital stocks are collected and compiled at own funds at book value (OFBV) BPM5 and BD4 recommend that market price be used as the basis of valuation for both flows and stocks. This method of valuation ensures more consistency when analyzing flows and stocks at a global or more detailed level This recommendation can be easily implemented for FDI equity capital stock in listed companies. However, the market value (MV) of FDI equity capital stock in unlisted companies, which represents the most important part of direct investment enterprises in France and abroad, has to be estimated Estimations of MV are based on the capitalization ratio method. Ratios are calculated for listed companies and then applied to peer unlisted companies 21

22 Valuation of FDI positions at market value (2/3) 1. Capitalization ratio = Price to Book (PtB) = market capitalization (MV) / own funds at book value (BV) Data are collected for two separate Peer groups of listed companies in the French stock exchange The peer group for outward FDI is the French resident companies in the CAC 4 index. Since CAC 4 groups own more than two-thirds of the foreign affiliates and do most of their business abroad (around 75-8%), this population constitutes a good and straightforward estimate for outward FDI MV The peer group for inward FDI is the French resident companies in the All-Tradable index, after stripping out the CAC 4 companies. This peer group has been selected in accordance with the Eurostat Working Group on Unquoted Shares (WGUS) recommendations 22

23 Valuation of FDI positions at market value (3/3) 2. To calculate the capitalization ratios of peer groups, we use the shareholder s equity from consolidated financial statements A median capitalization ratio is calculated for 4 branches defined with ICB first digit level (1- Energy and manufacturing; 2- Trade and non financial services; 3- Financial services; 4- New technologies). Market capitalization and industrial classification (ICB) are provided by Nyse-Euronext 3. The ratios are discounted of 25% to take into account the lower liquidity of unlisted companies The ratios are then applied to the stock of FDI equity capital stocks at BV for the 4 same branches 4. Series at MV calculated with this method are available from 2 to

24 Outward FDI stock at market value 125 in bn Equity at market value Real estate at market value Other capital

25 Inward FDI stock at market value 1 in bn Equity at market value Real estate at market value Other capital

26 FDI stocks comparison between book value (OFBV) and market value (MV) (in bn) Outward FDI (OFBV) Outward FDI (MV) Inward FDI (OFBV) Inward FDI (MV)

27 Net position: book value and market value 6 6 (in bn) FDI net position (OFBV) FDI net position (MV)

28 Direct Investment Income (1/2) Income on Debt (interest) For the time being, it is not distinguished from interest paid to and received from non affiliates which is classified within other investment income. France has a commitment to publish and to deliver data relative to interest paid to and received from foreign affiliates to the ECB and Eurostat from 212 onwards Income on Equity Income on equity is measured on the basis of the Current Operating Performance Concept (according to the OECD Benchmark Definition of FDI). Operational earnings exclude gains or losses arising from valuation changes, exchange rate changes or other abnormal capital gains or losses and could be therefore different from the net income released by enterprises 28

29 Direct Investment Income (2/2) Income on Equity is subdivided into two parts: dividends which are distributed to the Direct Investors, and reinvested earnings which consist of the current income retained in the Direct Investment Enterprises For the time being, earnings reinvested in indirectly controlled affiliates and subsidiaries are not taken into account 29

30 Income on Outward FDI 6 5 Outward FDI income of which Reinvested earnings 5,9 58,1 57, , , , , ,9 (in bn) -9,

31 Income on Inward FDI 4 4 Inward FDI income of which Reinvested earnings (in bn) ,6 2 21, 2 15,1 17,7 1 5,1 7, 1 -,3-4,8-2,

32 Net FDI Income contribution to the French balance of payments current account 6 6 Outward FDI income 5 4 Inward FDI income FDI income - net balance (in bn)

33 FDI rate of return (1/2) The FDI rate of return is calculated by dividing the FDI income of the year (n) by the FDI stock (equity capital without real estate) of the year-end (n-1) The rate of return calculated with the FDI stock at book value shows an average difference of 2 percentage points between French DI abroad and Foreign DI in France during the 1 last years in favor of French DI abroad The rate of return calculated with the FDI stock at market value shows also a difference in favor of French DI abroad, but the difference is equal to 1 percentage point in average since 21 (with an enlargement in 211) Our estimates of FDI stocks at market value minimize the gap in rate of return, both between French DI abroad and Foreign DI in France and between different years 33

34 FDI rate of return (2/2) The financial turmoil can be seen clearly in the rate of return s curves: The rates of return of FDI stocks at book value, which had reached their heights in 26 for French DI abroad and in 27 for Foreign DI in France, decreased sharply in 28 and 29, in relation with declining FDI income, before a rise in 21 and a new fall in 211 However the prices on stock markets had so strongly fallen in 28 that, in spite of declining FDI income, the rates of return of FDI stocks at market value have improved in 29. In particular, the rate of return of FDI stocks in France at market value has improved by 2.5 percentage points, to 6.3% (see chart hereafter) 34

35 Rate of return a comparison stocks at book value , ,1 8,2 8 6,5 7, , ,2 rate of return on outward FDI in equity (excluding real estate) rate of return on inward FDI in equity (excluding real estate) 2 -,

36 12 1 Rate of return a comparison stocks at market value rate of return on outward FDI in equity (excluding real estate) rate of return on inward FDI in equity (excluding real estate) ,9 7,7 6,8 7, , ,8 2,7 2 -,

37 Bibliography Annual report, the French balance of payments and International Investment position in 211, June 212 (the French version is already available on the Banque de France website ; the English version will be available by September) French outward and inward foreign direct investment in 29 - New presentation, Nivat and Terrien, Banque de France Bulletin, Quarterly Selection of Articles Winter Valuation of unquoted foreign direct investment stocks at market value: methods and results for France, Nivat and Topiol, Banque de France Bulletin, Quarterly Selection of Articles - Spring 21 Application de la règle du principe directionnel étendu aux statistiques d investissements directs, Nivat et Terrien, complément au rapport du Conseil d Analyse Économique, Investissement direct étranger et performances des entreprises, avril 21 (French only) 37