11. Background information

Guidance on interpreting foreign direct investment statistics and making international comparisons

Exchange rates

Enterprises are asked to return values in sterling, as entered in their accounts, rounded to the nearest £0.1 million. Where conversion from a foreign currency is involved, they are asked to use the same rate of exchange as in their own accounts. The effect of exchange rates should not be underestimated as these can also have a large impact on the differences between positions figures when making comparisons with other countries.

Valuation of equity

Enterprises are asked to return market values and book values where possible. Enterprises are asked to refrain from using any other valuation method such as historical cost. Book values are likely to be notably different from current market values as book values tend to reflect values at earlier periods when assets were acquired or subsequently re-valued. The effect of using different valuation methods should not be underestimated as these can also have a large impact on the differences between positions figures when making comparisons with other countries.

Special Purpose Entities (SPEs)

These companies, that have been set up for pass through investment purposes, are very difficult to identify and as a consequence, there can be huge discrepancies in data with countries such as Luxembourg and the Netherlands. Current methodology stipulates that we measure cross-border transactions only but merely identify whether the partner country is an SPE or not. We do not ask where the next destination is and this can show distortions in the figures.

Main concepts and definitions

All time series in this release are on a “current price” basis, which means that the values are as they were at the time of measurement and not adjusted for inflation.

Affiliate

An affiliate is an umbrella term that covers both subsidiaries and associates where the investor holds more than 10% of the equity share capital.

Table 4: Affiliate FDI relationship Minimum Investment Maximum Investment Affiliate 10% 100% - Associate 10% Less than 50% - Subsidiary Greater than 50% 100% Download this table Table 4: Affiliate .xls .csv

Branch

A branch is a permanent establishment as defined for UK Corporation Tax and Double Taxation Relief purposes. This is not a separate legal entity. Such establishments should either have a complete set of accounts or be able to compile a meaningful set of accounts, from both an economic and legal viewpoint.

Direct investment

Foreign direct investment (FDI) refers to investment that adds to, deducts from or acquires a lasting interest in an enterprise operating in an economy other than that of the investor, where the investor’s purpose is to have an effective voice in the management of the enterprise.

For the purposes of FDI statistics, an effective voice is taken as equivalent to holding 10% or more of the equity share capital in the direct investment enterprise. Other investments, in which the investor does not have an effective voice in the management of the enterprise, are mainly portfolio investments and these are not covered in this release.

From the 2005 FDI Survey, cross-border investment by public corporations and private property investments are included, as in balance of payments data. Direct investment is a financial concept and is not the same as capital expenditure on fixed assets. It covers only the money invested in a related enterprise by the parent company with the enterprise having the discretion on how to use it.

A related enterprise may also raise money locally without reference to the parent company. The investment figures are published on a net basis, that is, they consist of investments net of disinvestments by a company into its subsidiaries.

Direct investment earnings

Direct investment earnings (a part of the income account) provide information on the earnings of direct investors. These can arise from both equity and debt.

Direct investment flows

Direct investment flows (or transactions) show the net inward and outward investments made during any given reference period. FDI flows comprise of:

acquisitions or disposals of equity capital

reinvestment of earnings

inter-company debt

FDI inward flows provide a useful indicator in relation to the attractiveness of economies but such interpretations require additional information on which to base sound conclusions.

Direct investment positions

Direct investment positions (also known as levels or stocks) provide information on the total amount of investment made abroad or received from abroad for a given reference date.

Inward direct investment

From a UK perspective, inward direct investment is investment in a UK-resident affiliate (subsidiary or associate) or branch by a non-UK parent company or head office. This can also be referred to as direct investment into the UK.

Outward direct investment

From a UK perspective, outward direct investment is investment by a UK-resident company in a non-UK affiliate (subsidiary or associate) or branch. This can also be referred to as direct investment abroad.

Reinvested earnings

Reinvestment of earnings, or reinvested earnings, refer to earnings on equity accruing to direct investors less the value of distributed earnings. Reinvested earnings are included in direct investment income because the earnings of the subsidiary, associate or branch are deemed to be the income of the direct investor (proportionate to the direct investor’s holding of equity), whether they are reinvested in the enterprise or remitted to the direct investor. Reinvested earnings are also treated as a flow of direct investment from the direct investor to their overseas enterprise.

Special Purpose Entities (SPEs)

The term SPE is used to refer to entities such as financing subsidiaries, shell companies and conduits, which typically do not conduct any notable operations in the country in which they are resident other than to pass through investments from their parent company to an affiliate in another country.

Discussing ONS business statistics online

There is a Business and Trade Statistics community on the StatsUserNet website. StatsUserNet is the Royal Statistical Society’s interactive site for users of official statistics. The community objectives are to promote dialogue and share information between users and producers of official business and trade statistics about the structure, content and performance of businesses within the UK. Anyone can join the discussions by registering via either of the links provided previously.