European Economy. Economic Papers. Germany's growth performance in the 1990's

Box 4: FDI as an indicator for Germany’s attractiveness as a business location
Recognising the link between FDI and macroeconomic developments, changes in the former
have often been interpreted as signalling a certain locational weakness or strength of the
economy. While the links are usually confirmed by empirical studies, there are some doubts
about the soundness of FDI-based statements, in particular with respect to the indicator
properties of FDI.
B4.1 Different FDI definitions in the 1990s
One drawback to international comparisons stems from the heterogeneity of FDI data due to
different definitions followed by data collecting institutions. FDI comprises investment in which
a resident of one country obtains a lasting interest in, and a degree of influence over the
management of, a business enterprise in another country. According to both the OECD
Benchmark Definition and the IMF Balance of Payments Manual the criterion used to
distinguish FDI from other types of investment is ownership of at least 10% of the voting
securities of an incorporated business enterprise or the equivalent interest in an unincorporated
enterprise. FDI comprises three components: new equity parent companies provide to their
affiliates, i.e. enterprises in which the parent company or investor owns at least 10 percent,
reinvested earnings of the affiliate, and long and short term loans from the parent to the affiliate
(inter-company debt). But for instance the Bundesbank has only adopted the definition given
above in January 1999 by reducing the threshold from 20 to 10% and by starting to consider
short-term credits and trade credits from the parent to the affiliate as DI, but reporting
requirements are still based on the 20% threshold.
B4.2 Statistical discrepancies might distort analysis
In much of the debate in Germany many participants have based assessments on data obtained
from German balance of payments statistics. But the main objective of these statistics is to
mirror financial transactions. Moreover, one has to acknowledge that the reporting systems and
recording practices for direct investment flows have greatly differed from country to country. In
order to illustrate the significance of this problem the Bundesbank has compared data based on
German balance of payments statistics with those obtained from foreign balance of payments
statistics. Some of the results for the first half of the 1990s are displayed in the table below.