Foreign direct investment according to the benchmark

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> Foreign direct investment According to the benchmark definition of foreign direct investment provided by the OECD, in line with the IMF’s Balance of Payments Manual: “Direct investment is a category of cross-border investment made by a resident in one economy (‘the direct investor’) with the objective of establishing a lasting interest in an enterprise (‘the direct investment enterprise’) that is resident in an economy other than that of the direct investor. The motivation of the direct investor is a strategic long-term relationship with the direct investment enterprise to ensure a significant degree of influence by the direct investor in the management of the direct investment enterprise. The ‘lasting interest’ is evidenced when the direct investor owns at least 10% of the voting power of the direct investment enterprise…” FDI flows comprise a wide variety of transactions. In addition to share capital transactions and reinvested earnings, direct investment encompasses all short- and long-term deposits, advances and loan transactions between affiliated companies. The end purpose of some of these financial flows is identical to that of share capital transactions: this is the case, for example, when a parent company makes out a loan to a non-resident subsidiary to cover an expansion in output capacity. However, other financial flows arise from fiscal considerations, involving the establishment by multinational firms of holding companies and treasury centers in a number of European countries for tax purposes. As such, globalization and the growing international footprint of companies have contributed to a surge in short-term transactions and the heightened volatility of foreign direct investment flows. UNCTAD collects and aggregates FDI flow data provided by central banks without differentiating between the various components of these flows. Accordingly, no distinction is made between tax avoidance by businesses (intra-group loans) and new investment sites (share capital transactions in the strict sense of the term). Furthermore, the financial flows arising from internal loans made by multinational firms (intra-group loans) frequently comprise any number of transactions in both directions, inward and outward, which offset each other during the course of the year. The major fluctuations in intra-group loans render FDI flows extremely volatile. Annual estimates by the Banque de France are made using the “extended directional principle” methodology, now recommended by both the IMF and the OECD, which provides a more realistic economic picture of these transactions. It involves adjusting for intra-group loans so as to obtain a single annual net figure for each multinational group, instead of recording each and every transaction, which are often offset by one another, throughout the year. The Banque de France is one of the few central banks to apply the extended directional principle, thereby limiting the impact that intra- group loans between subsidiaries have on FDI flows. For this reason alone, any form
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