Indirect Foreign Direct Investment

Indirect foreign direct investments (indirect FDI) are foreign direct investments of a multinational enterprise (MNE) that are carried by a foreign subsidiary located in a third country. The MNE obtains a lasting interest in a foreign market, being the ultimate owner of the investment made, but the actual investment operation is carried out by a subsidiary located in a country that is different from its original country.

According to the Organisation for Economic Cooperation and Development-published benchmark definition, foreign direct investment (FDI) is defined on the basis of the objective of an entity that is resident in an economy of establishing lasting interests in an enterprise that is resident in a foreign economy, implying a long-term relationship between them. FDI can be direct, made up by the entity in the target market directly, or indirect, when a third country is involved.

The Balance of Payments and International Investment Position Manual of the International Monetary Fund (the IMF Manual), in its 6th edition, states that

Three different countries are involved in an indirect FDI relationship. One is the origin country, where the parental company is located. Another is the destiny country, where the investment is made. There is a third country, in which the parental company owns an entity, and the latter is the one that actually makes the investment in the destiny country. The key difference between direct and indirect investment is that, in the first type, the operation is straight from the origin to the destiny and, in the second type, there is the intermediate country. It is noteworthy that indirect FDI may be viewed as part of two direct FDI flows: one from the origin to the intermediate, where the parental company sets up an interest in the intermediate country; and another from the intermediate county to the destiny.

For data recording, a threshold of 10 percent of ownership is generally taken as the minimum evidence of a long-lasting FDI relationship. Such threshold refers to both direct and indirect ownership. Therefore, if data on foreign direct investment were to follow the ownership criterion, there should be included both the direct and indirect interests of the parental MNE. However, balance of payments statistics usually take into account the location of the origin and destiny enterprises so that countries may not be able to trace back the actual ownership of the companies. Countries may require companies to detail their entire worldwide consolidated accounts.

The most typical motives for indirect FDI include public policies and corporate strategy. Public policies that may induce or discourage indirect FDI include the different national patterns of taxation, which may stimulate or discourage some forms of corporate property and control. In addition, countries vary in terms of their specific forms for treatment of foreign investments. There are other public policies that may affect incentives to use a direct investing company located in a country that is different than the original investing group. Embargoes on investments may also play a role in inducing indirect FDI, so that the interested investor may overcome the restriction by investing through a base country not affected by the embargo.

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