## D.1 Greenfield Investment and Extension of Capacity

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---

### Background
- Direct investment (DI) can bring capital, technology, management know-how and improved market access and be a significant force for development and growth (BPM6 Update, Direct Investment Task Team (DITT)).
- Current DI statistics do not separately identify investments that represent creation of new business enterprises in the host economy (greenfield) and additional injections of funds to existing ones (extensions of capacity).
- Greenfield investment is described as an investment that brings new and additional resources and assets to the enterprise and often leads to gross fixed capital formation (GFCF), typically increasing output, employment, and productivity.
- Two main measurement concepts are considered:
  - The transaction approach: DI transactions are broken down by type (cross-border M&As; greenfield investments; extension of capital; financial restructuring).
  - The capital approach: measures fixed capital formation of newly created direct investment enterprises (DIE) and expansion of existing affiliates regardless of the source of funding, which lies outside the BPM6 DI concept.
- OECD BD4 recommended a supplemental series for DI equity flows only for M&As and notes that “greenfield investments refer to altogether new investments (ex nihilo investments). Extension of capital relates to additional new investments as a physical expansion of an established business; conceptually and in terms of economic impact, it is similar to greenfield investments” (BD4).
- Country practices:
  - United States BEA: collects data on new foreign direct investment in the United States since 1980 and on expansion of existing U.S. affiliates since 2014; defines greenfield expenditures as expenditures, regardless of the source of funding, to establish new business and expand existing foreign-owned business; information collected by mandatory survey.
  - Eurostat pilot (2019): 25 countries (24 EU members and Iceland) participated; pilot incorporated both transaction and capital concepts; recommended transaction approach in short term while capital approach might be preferred long term; EU Member States supported voluntary data collections on Greenfield Investment as of March 2022 (T+15 months with limited geographical breakdown for reference years 2019–2020), followed by a second, more detailed data collection in September 2022 (T+21 months with breakdown by geographical and economic activity for reference years 2019–2020).

### Issues for Discussion (measurement challenges and trade-offs)
- Transactions approach strengths and limitations:
  - Identifies sources of DI funds for capital formation but does not capture total capital expenditure or its full economic impact.
  - Funding recorded may be used for working capital instead of capital expenditures.
  - Capital expenditures can exceed funds recorded as DI transactions due to additional funding sources.
- Capital approach strengths and limitations:
  - Provides a fuller measure of capital expenditures but includes funding outside the BOP/IIP DI concept and thus goes beyond BPM6.
- Specific practical challenges:
  - Transaction approach: small amounts, confidentiality constraints, difficulty classifying a DI transaction by a single purpose, increased reporter burden.
  - Capital approach: defining expansions of capacity versus maintenance/replacement/upgrading; tracking prior foreign ownership; handling holding companies and real estate; inability of companies to separate greenfield amounts in accounts when transactions and expenditures serve multiple purposes.
- Third approach (United States example):
  - Directly collecting total expenditures by foreign investors to establish or expand business; resource intensive and not aligned with the DI concept in BPM6 because it collects total expenditures regardless of source of funding.

### Outcomes and Recommendations of the DITT
- DITT deliberations:
  - Capital approach seen as potentially more appropriate analytically for measuring impact and for linking to other data such as GFCF, but it goes beyond BOP/IIP.
  - Transactions approach is within the BOP/IIP framework and aligns with BD4 treatment of M&A transactions, but classification by purpose is a practical concern.
  - For the capital approach, members proposed including research & development (R&D) expenditures in addition to physical assets to capture value in industries relying on intellectual property.
- Recommendation:
  - Include guidance in the updated IMF Balance of Payments and International Investment Position Manual, sixth edition (BPM6) on definition and collection of data on greenfield investments and extension of capacity as a supplemental DI series, provided clear definitions can be developed.
  - Use the transactions approach for the supplemental DI series because it is within the BOP/IIP framework and consistent with BD4 for M&A transactions.
  - The Compilation Guide should include practical guidance, templates, and discussion on whether to include equity and debt.
- Proposed components to be reported separately:
  - Greenfield investments and extensions of capacity (= i + ii). Of which:
    - i) Greenfield investments (investments in newly established FDI enterprises);
    - ii) Extension of capacity (expansion of business activities).
- Collection scope:
  - Collect greenfield investments and extension of capacity for both equity (other than reinvestment of earnings) and debt instruments, and exclude “pass-through” funds, if possible.
  - Ideal breakdowns: industry of the DIE and geographical breakdown of the (ultimate) investor.
- If direct collection is difficult, alternative methods to approximate transaction-based greenfield statistics:
  - i) Administrative data from investment approvals, economic development offices, press reports, or commercial databases.
  - ii) Residual approach: eliminate other types of DI transactions, particularly cross-border M&As.

### Definition proposals and conventions
- Definition proposed by the DITT:
  - “Greenfield investments refer to altogether new investments (ex nihilo investments). These investments are expected to have a positive impact (either short, medium or long term) on the host economy such as rise in employment, increased tax revenues etc.”
  - “Extension of capacity relates to additional new investments as an expansion of an established business. These transactions increase the productive capacity of the economy. This makes them conceptually, and in terms of economic impact, similar to greenfield investments and are likely to fulfill the same criteria on impact on the host economy as greenfield investments.”
- Further guidance needed:
  - Develop criteria for the expected impact on the host economy.
  - Establish a convention for the time period during which investments in a newly established enterprise are considered greenfield investments (example suggested: the first three years after establishment).

### Alternative recommendation and forward work
- The Task Team acknowledges the capital approach could yield valuable analytical information on impact and contribution to GFCF but recognizes it is beyond BPM scope.
- Capital approach could be developed in a cross-cutting context with statistics on multinational enterprises (MNEs) as recommended in GN D.9 or as part of an update of BD4.
- The DITT recommends research and testing using the transactions approach before developing detailed guidance.

### Questions for Discussion posed by the DITT
- 1. Do you agree that further guidance on the definition and collection of data on greenfield investments and extension of capacity according to the transactions approach (FDI by type) should be included in the update of BPM on a supplemental basis?
- 2. Do you agree that both greenfield investments in newly established enterprises and extension of capacity into existing businesses should be collected as the impact on the host economy is expected to be similar?
- 3. Do you agree that the capital approach should be explored as part of the development of a framework to reconcile DI and statistics on MNEs as recommended in the GN for D.9?
- 4. Do you agree that a period of research and testing be undertaken to gather more experience in collecting such statistics using the transactions approach before detailed guidance is further developed?

### Transactions (purpose) approach: segregating FDI by intended use
- Assumption: residual FDI funds are mainly used for Fixed Capital Formation (FCF) purposes, accounting for all or part of DIEs FCF financing.
- Strengths and limitations:
  - It is not as precise as the capital approach.
  - It largely articulates the role of FDI in providing capital funds for DIEs.
- Ideal stratification:
  - Separate FDI injections into newly created DIEs (narrow FDI transactions measure of Greenfield) and existing DIEs (broad FDI transactions measure of GI).
  - Stratify between control transactions (the core variable) and influence FDI transactions, although control transactions are expected to dominate in most economies.
- Basic breakdown to ensure funds are mainly used for FCF:
  - FDI purpose transactions (excluding reinvested earnings (RIE))
  - Mergers and acquisitions (M&As) transactions, as well as transactions related to restructurings
  - Inflows into newly created DIEs
  - Inflows into existing DIEs
- Complications:
  - Some M&As and some restructurings (reflected in FDI asset-side transactions among investors) can result in injections of funds into existing (and, in rare cases, new) DIEs.
  - An additional calculation would ideally be required to identify such DIE inflows and reallocate these to existing DIEs in the breakdown above.
- Flexibility:
  - Some countries may opt for a slightly different purpose breakdown than specified above, depending on source data and existing collection/compilation methods.
- Time-frame issue for newly-created DIEs:
  - Key question: how long is a newly-created DIE actually a new enterprise? For existing DIEs, there is no time frame.
  - It is advisable for countries to use a one- to three-year time frame for newly created DIEs.
  - Specific recommendation in the pilot study: a three-year time frame.
  - After this point, the newly created DIEs become existing DIEs.
  - If the focus is on the transactions approach, the estimates are broken down between newly created DIEs and existing DIEs.

### The Capital Approach: total FCF of DIEs
- Definition:
  - The capital approach can be more specifically described as the total FCF of the DIE.
  - Equivalent to the FATS variable approach, where the compiler adds FCF as a FATS variable (using either a survey or a record linkage methodology).
- Rationale:
  - This approach gets at the total FCF of the DIEs, classified by control relationships.
  - The FATS concept of control (majority ownership) is appropriate, as the controlling parent decides on the DIEs FCF.
  - The FATS approach would capture all of the FCF undertaken by the domestic subsidiary, regardless of funding.
- Coverage:
  - Includes the DIE FCF of:
    - (i) newly established subsidiaries
    - (ii) existing subsidiaries (including FCF of their domestic majority-owned subsidiaries)
  - These components could be sub-stratified by using the FDI frame.
- Precision and supplementation:
  - Adds precision to the calculation because the total FCF of the foreign controlled DIEs is a target measure.
  - Could be supplemented by a similarly constructed FCF related to FDI influence relationships, though this is expected to be a relatively small supplementary measure based on the dominance of control relationships in many economies.

*Prepared by the Direct Investment Task Team (DITT) for the BPM6 Update, IMF Committee on Balance of Payments Statistics. Source: International Monetary Fund, d1-greenfield-investment-and-extension-of-capacity.*

### Section 1

### D.1 Greenfield Investment and Extension of Capacity

### Background
- Direct investment (DI) can bring capital, technology, management know-how and improved market access and be a significant force for development and growth (BPM6 Update, Direct Investment Task Team (DITT)).
- Current DI statistics do not separately identify investments that represent creation of new business enterprises in the host economy (greenfield) and additional injections of funds to existing ones (extensions of capacity).
- Greenfield investment is described as an investment that brings new and additional resources and assets to the enterprise and often leads to gross fixed capital formation (GFCF), typically increasing output, employment, and productivity.
- Two main measurement concepts are considered:
  - The transaction approach: DI transactions are broken down by type (cross-border M&As; greenfield investments; extension of capital; financial restructuring).
  - The capital approach: measures fixed capital formation of newly created direct investment enterprises (DIE) and expansion of existing affiliates regardless of the source of funding, which lies outside the BPM6 DI concept.
- OECD BD4 recommended a supplemental series for DI equity flows only for M&As and notes that “greenfield investments refer to altogether new investments (ex nihilo investments). Extension of capital relates to additional new investments as a physical expansion of an established business; conceptually and in terms of economic impact, it is similar to greenfield investments” (BD4).
- Country practices:
  - United States BEA: collects data on new foreign direct investment in the United States since 1980 and on expansion of existing U.S. affiliates since 2014; defines greenfield expenditures as expenditures, regardless of the source of funding, to establish new business and expand existing foreign-owned business; information collected by mandatory survey.
  - Eurostat pilot (2019): 25 countries (24 EU members and Iceland) participated; pilot incorporated both transaction and capital concepts; recommended transaction approach in short term while capital approach might be preferred long term; EU Member States supported voluntary data collections on Greenfield Investment as of March 2022 (T+15 months with limited geographical breakdown for reference years 2019–2020), followed by a second, more detailed data collection in September 2022 (T+21 months with breakdown by geographical and economic activity for reference years 2019–2020).

### Issues for Discussion (measurement challenges and trade-offs)
- The transactions approach identifies sources of DI funds for capital formation but does not capture total capital expenditure or its full economic impact:
  - Funding recorded may be used for working capital instead of capital expenditures.
  - Capital expenditures can exceed funds recorded as DI transactions due to additional funding sources.
- The capital approach provides a fuller measure of capital expenditures but includes funding outside the BOP/IIP DI concept and thus goes beyond BPM6.
- Specific practical challenges:
  - Transaction approach: small amounts, confidentiality constraints, difficulty classifying a DI transaction by a single purpose, increased reporter burden.
  - Capital approach: defining expansions of capacity versus maintenance/replacement/upgrading; tracking prior foreign ownership; handling holding companies and real estate; inability of companies to separate greenfield amounts in accounts when transactions and expenditures serve multiple purposes.
- A third approach used by the United States involves directly collecting total expenditures by foreign investors to establish or expand business; it is resource intensive and not aligned with the DI concept in BPM6 because it collects total expenditures regardless of source of funding.

### Outcomes and Recommendations of the DITT
- DITT deliberations:
  - Capital approach seen as potentially more appropriate analytically for measuring impact and for linking to other data such as GFCF, but it goes beyond BOP/IIP.
  - Transactions approach is within the BOP/IIP framework and aligns with BD4 treatment of M&A transactions, but classification by purpose is a practical concern.
  - For the capital approach, members proposed including research & development (R&D) expenditures in addition to physical assets to capture value in industries relying on intellectual property.
- Recommendation:
  - Include guidance in the updated IMF Balance of Payments and International Investment Position Manual, sixth edition (BPM6) on definition and collection of data on greenfield investments and extension of capacity as a supplementary DI series, provided clear definitions can be developed.
  - Use the transactions approach for the supplemental DI series because it is within the BOP/IIP framework and consistent with BD4 for M&A transactions.
  - The Compilation Guide should include practical guidance, templates, and discussion on whether to include equity and debt.
- Proposed components to be reported separately:
  - Greenfield investments and extensions of capacity (= i + ii). Of which:
    - i) Greenfield investments (investments in newly established FDI enterprises);
    - ii) Extension of capacity (expansion of business activities).
- Collection scope:
  - Collect greenfield investments and extension of capacity for both equity (other than reinvestment of earnings) and debt instruments, and exclude “pass-through” funds, if possible.
  - Ideal breakdowns: industry of the DIE and geographical breakdown of the (ultimate) investor.
- If direct collection is difficult, alternative methods to approximate transaction-based greenfield statistics:
  - i) Administrative data from investment approvals, economic development offices, press reports, or commercial databases.
  - ii) Residual approach: eliminate other types of DI transactions, particularly cross-border M&As.

### Definition proposals and conventions
- Definition proposed by the DITT:
  - “Greenfield investments refer to altogether new investments (ex nihilo investments). These investments are expected to have a positive impact (either short, medium or long term) on the host economy such as rise in employment, increased tax revenues etc.”
  - “Extension of capacity relates to additional new investments as an expansion of an established business. These transactions increase the productive capacity of the economy. This makes them conceptually, and in terms of economic impact, similar to greenfield investments and are likely to fulfill the same criteria on impact on the host economy as greenfield investments.”
- Further guidance needed:
  - Develop criteria for the expected impact on the host economy.
  - Establish a convention for the time period during which investments in a newly established enterprise are considered greenfield investments (example suggested: the first three years after establishment).

### Alternative recommendation and forward work
- The Task Team acknowledges the capital approach could yield valuable analytical information on impact and contribution to GFCF but recognizes it is beyond BPM scope.
- Capital approach could be developed in a cross-cutting context with statistics on multinational enterprises (MNEs) as recommended in GN D.9 or as part of an update of BD4.
- The DITT recommends research and testing using the transactions approach before developing detailed guidance.

### Questions for Discussion posed by the DITT
- 1. Do you agree that further guidance on the definition and collection of data on greenfield investments and extension of capacity according to the transactions approach (FDI by type) should be included in the update of BPM on a supplemental basis?
- 2. Do you agree that both greenfield investments in newly established enterprises and extension of capacity into existing businesses should be collected as the impact on the host economy is expected to be similar?
- 3. Do you agree that the capital approach should be explored as part of the development of a framework to reconcile DI and statistics on MNEs as recommended in the GN for D.9?
- 4. Do you agree that a period of research and testing be undertaken to gather more experience in collecting such statistics using the transactions approach before detailed guidance is further developed?

*Prepared by the Direct Investment Task Team (DITT) for the BPM6 Update, IMF Committee on Balance of Payments Statistics.*

### Section 2

### d1-greenfield-investment-and-extension-of-capacity - Section 2

### Transactions (purpose) approach: segregating FDI by intended use
- Assumption: residual FDI funds are mainly used for Fixed Capital Formation (FCF) purposes, accounting for all or part of DIEs FCF financing.
- Strengths and limitations:
  - It is not as precise as the capital approach.
  - It largely articulates the role of FDI in providing capital funds for DIEs.
- Ideal stratification:
  - Separate FDI injections into newly created DIEs (narrow FDI transactions measure of Greenfield) and existing DIEs (broad FDI transactions measure of GI).
  - Stratify between control transactions (the core variable) and influence FDI transactions, although control transactions are expected to dominate in most economies.
- Basic breakdown to ensure funds are mainly used for FCF:
  - FDI purpose transactions (excluding reinvested earnings (RIE))
  - Mergers and acquisitions (M&As) transactions, as well as transactions related to restructurings
  - Inflows into newly created DIEs
  - Inflows into existing DIEs
- Complications:
  - Some M&As and some restructurings (reflected in FDI asset-side transactions among investors) can result in injections of funds into existing (and, in rare cases, new) DIEs.
  - An additional calculation would ideally be required to identify such DIE inflows and reallocate these to existing DIEs in the breakdown above.
- Flexibility:
  - Some countries may opt for a slightly different purpose breakdown than specified above, depending on source data and existing collection/compilation methods.
- Time-frame issue for newly-created DIEs:
  - Key question: how long is a newly-created DIE actually a new enterprise? For existing DIEs, there is no time frame.
  - It is advisable for countries to use a one- to three-year time frame for newly created DIEs.
  - Specific recommendation in the pilot study: a three-year time frame.
  - After this point, the newly created DIEs become existing DIEs.
  - If the focus is on the transactions approach, the estimates are broken down between newly created DIEs and existing DIEs.

### The Capital Approach: total FCF of DIEs
- Definition:
  - The capital approach can be more specifically described as the total FCF of the DIE.
  - Equivalent to the FATS variable approach, where the compiler adds FCF as a FATS variable (using either a survey or a record linkage methodology).
- Rationale:
  - This approach gets at the total FCF of the DIEs, classified by control relationships.
  - The FATS concept of control (majority ownership) is appropriate, as the controlling parent decides on the DIEs FCF.
  - The FATS approach would capture all of the FCF undertaken by the domestic subsidiary, regardless of funding.
- Coverage:
  - Includes the DIE FCF of:
    - (i) newly established subsidiaries
    - (ii) existing subsidiaries (including FCF of their domestic majority-owned subsidiaries)
  - These components could be sub-stratified by using the FDI frame.
- Precision and supplementation:
  - Adds precision to the calculation because the total FCF of the foreign controlled DIEs is a target measure.
  - Could be supplemented by a similarly constructed FCF related to FDI influence relationships, though this is expected to be a relatively small supplementary measure based on the dominance of control relationships in many economies.

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_Source: https://www.imf.org/-/media/files/data/statistics/bpm6/ditt/d1-greenfield-investment-and-extension-of-capacity.pdf_