fdi in india and its growth linkages - Department Of Industrial Policy ...

FDI IN INDIA AND ITS GROWTH LINKAGES
a partner country may switch to another country. Thus, the current methodology to compile FDI statistics in India needs
to be revised to better reflect foreign direct investment positions (stocks) and transactions (flows).
8.3 OECD Methodology
In April 2008, the Organisation of Economic Cooperation and Development (OECD) brought out the fourth edition
of the Benchmark Definition of Foreign Direct Investment. This incorporates recent changes in terms of the activities
of multinational enterprises and types of investments these enterprises are undertaking across countries.
According to OECD (2008), “foreign direct investment reflects the objective of establishing a lasting interest by a
resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an
economy other than that of the direct investor” (p.15). The purpose of establishing a long-term relationship by a direct
investor with the direct investment enterprise is to exercise a significant influence on the management of the direct
investment enterprise. The “lasting interest” is acquired when the direct investor owns at least 10 per cent of the voting
power in the direct investment enterprise. Though opinions are divided on the cut-off percentage of voting power to be
held by the direct investor to have an effective voice in the management of the direct investment enterprise, the OECD
recommends the 10 per cent threshold to ensure statistical consistency across countries. The OECD’s Benchmark
Definition embraces the concepts and definitions of the International Monetary Fund’s Balance of Payments and
International Investment Positions Manual (BPM) as well as the System of National Accounts of the Commission of
the European Communities, the International Monetary Fund, OECD, the United Nations and the World Bank.
8.4 Concept of Economic Territory and Residence
Foreign direct investment includes transactions/positions between a resident and a non-resident institutional unit. It
excludes all transactions/positions between units that are residents of the same country. Thus, the concept of residence
is important in determining cross-border investments between residents of two or more economic territories. Each
institutional unit 1 is considered as a resident of one and only one economic territory. 2 According to the System of
National Accounts, there are two types of institutional units, viz., households, and legal and social entities. Households
can be direct investors but not direct investment enterprises. Legal and social entities include governments, corporations
and non-profit institutions; they also include quasi-corporations, which are unincorporated enterprises belonging to
households or government units, and they may behave in much the same ways as corporations. While only business
enterprises can be both direct investors and direct investment enterprises, government and non-profit organisations can
be direct investors but not direct investment enterprises. Though some units like households may have links with more
than one economy, for statistical consistency they are attached to a single economic territory.
The Benchmark Definition does not classify foreign direct statistics by institutional sectors, i.e., enterprise (legal and
social entities) types including corporations, quasi-corporations, branch, estates, other trusts and partnerships and special
corporate structures. 3 However, it is important to understand these institutional structures in determining whether a
particular transaction or position should be included in foreign direct investment statistics. The classification of resident
or non-resident institutional sectors is based on the principal product or products produced or distributed or service
rendered by various enterprise types.
Five institutional sectors are classified by the Benchmark Definition and are the same sectors that are reported by the
System of National Accounts. These are the non-financial corporation sector, financial corporation sector, government
1. Institutional unit is an economic entity that is capable, in its own right, of owning assets, incurring liabilities and engaging in economic activities and in
transactions with other entities.
2. In the Benchmark Definition, "economic territory" has the dimension of physical location as well as legal jurisdiction and is under the economic control
of a single government. The Benchmark also considers economic territory as country. However, it does not adhere to any legal (nationality) or statistical
(economy) definition.
3. For definitions of these terms, see OECD (2008), Chapter 3.
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