Eliminating the Pass-Through: Towards FDI Statistics That Better Capture the Financial and Economic Linkages between Countries

Foreign direct investment (FDI) plays a central role in the creation and management of complex production networks, but FDI flows and positions are also influenced by other factors, such as tax avoidance strategies and sophisticated capital structures used by MNEs. This can make it difficult to differentiate between FDI that represents “long-term” investments in a country and serves as a source of growth and jobs (often referred to as "real" FDI) and FDI that is purely financial and has little real economic impact as it merely passes through the economy. In turn, this latter FDI can significantly complicate the interpretability by obscuring the ultimate sources and destinations of FDI. This paper attempts to address these challenges by proposing a framework for consolidated FDI statistics based on the nationality of the MNE group that complements the residency-based FDI statistics. While residency-based financial statistics are useful to identify where financial claims and liabilities are created and held, nationality based statistics provide information on who makes the underlying decisions, reaps the benefits, and takes on the risk. The consolidated FDI statistics remove pass-through capital and are better suited to understanding the "real" nature of financial integration between economies and, in conjunction with statistics on the operations of MNEs, to analyse the relationship between the financing of MNEs and their operations. While some countries produce separate FDI statistics for resident Special Purpose Entities (SPEs) to identify pass-through capital, we demonstrate that this only provides a partial view and that about one-quarter of the inward FDI positions in a selection of European countries reflects pass-through capital through non-SPEs. It also appears that pass-through capital is growing faster than "real" FDI.