11.1　Background

An investment project is classified as direct investment if the investor acquires significant control over a firm.Thus, foreign direct investment (FDI)implies the acquisition and exertion of a significant control over a firm.The International Monetary Fund’s Balance of Payments Manual defines direct investment as “an investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor, the investor’s purpose being to have an effective voice in the management of the enterprise”.The direct investment enterprise is a branch or a subsidiary in which direct investment is made.

It is not clear, however, what constitutes “significant control” of a firm.For the purpose of preparing the balance of payments statistics, countries in general classify FDIs as those enterprises in which the percentage of foreign ownership is between 10 and 25 per cent.In the United States, Japan and Australia, a 10 per cent equity threshold is used to define direct investment.In other countries (including France, Germany and the United Kingdom)a higher threshold is used.Some countries (such as Belgium and the Netherlands)use no specific threshold but treat each case on its merits.Thus, what is regarded as direct investment by some countries may be considered portfolio investment (or something else)by some other countries.