Foreign Direct Investment (FDI) plays a crucial role in shaping global economies by facilitating cross-border investments. It refers to the investment made by a company or an individual from one country into a business enterprise located in another country. FDI is an essential indicator of economic globalisation and international business relationships. But how is FDI calculated? Let’s delve into the process to understand it better.
FDI calculation involves several components and is often carried out by government agencies, international organisations, and research institutions to track and analyse investment trends. Here are the key steps involved in calculating FDI:
Inward FDI and Outward FDI: FDI can be categorised into two main types – inward FDI and outward FDI. Inward FDI represents foreign investments flowing into a country, while outward FDI refers to domestic investments flowing out to other countries.
Equity Capital and Reinvested Earnings: The primary components of FDI are equity capital and reinvested earnings. Equity capital refers to the initial investment made by foreign investors to acquire ownership stakes in a company in the host country. Reinvested earnings are the profits earned by foreign-owned companies in the host country that are reinvested back into the same company.
Other Capital: Apart from equity capital and reinvested earnings, FDI may also include other capital components such as inter-company loans, financial derivatives, and trade credits related to the direct investment.
Direct Investment Position: To calculate FDI, countries maintain records of their direct investment positions, which represent the total value of FDI stocks at a specific point in time. This data includes both the stock of inward and outward FDI.
FDI Inflows and Outflows: FDI inflows represent the value of new investments flowing into a country during a specific period. On the other hand, FDI outflows reflect the value of new investments made by domestic companies in other countries during the same period.
Balance of Payments: FDI data is often incorporated into a country’s balance of payments (BOP) accounts. The BOP is a record of all economic transactions between a country and the rest of the world during a specific time frame. FDI inflows and outflows are accounted for in the capital account of the BOP.
Reporting and Surveys: Governments collect FDI data through various channels, including surveys, administrative records, and reports from multinational corporations. International organisations like the United Nations Conference on Trade and Development (UNCTAD) and the Organization for Economic Cooperation and Development (OECD) also play a role in collecting and disseminating global FDI data.
FDI Performance Indicators: FDI data is used to calculate various FDI performance indicators, such as FDI intensity (FDI as a percentage of GDP), FDI attractiveness index, FDI contribution to employment, and more. These indicators help assess the impact of FDI on host and home economies.
In conclusion, calculating FDI involves tracking the flow of investment between countries, recording equity capital and reinvested earnings, and integrating the data into balance of payments accounts. The data collected is essential for understanding the global investment landscape, identifying trends, and formulating policies to encourage foreign investment and foster economic growth.