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12.1. Direct investment is investment undertaken by an entity resident in one economy in an enterprise resident in another economy, with the objectives of obtaining or sustaining a lasting interest in the enterprise and exercising a significant degree of influence in its management. The entity undertaking the investment is referred to as the direct investor and the enterprise in which the investment takes place is referred to as the direct investment enterprise. These terms are described in box 12.1. (The concept of direct investment as set out above is consistent with BPM5. This is also the basis for the definition adopted in the second edition of the OECD Detailed Benchmark Definition of Foreign Direct Investment. In BPM5, a direct investment relationship is deemed to exist between two enterprises (a direct investor in one country and a direct investment enterprise in another country) when one has an equity interest in the other of at least 10 per cent. The BPM5 definition is more precise than that used in BPM4, which left compilers to choose a range of equity links between 10 and 25 per cent in which a direct investment relationship could be deemed to exist and, further, did not elaborate on how the definition should be applied down an ownership chain. In Australia, the 10 per cent link has been used since 1985-86; before this, the equity threshold used to determine a direct investment relationship was 25 per cent. However, the impact of that change in threshold was less than half of one percent of the level of foreign direct investment in Australia at 30 June 1986, and had no measurable impact on the measure of Australian direct investment abroad.)

	12.1 DEFINITIONS OF DIRECT INVESTMENT ENTERPRISE AND DIRECT INVESTOR
	A direct investment enterprise is an incorporated or unincorporated enterprise in which a direct investor owns 10 per cent or more of the ordinary shares or voting power (for an incorporated enterprise) or the equivalent (for an unincorporated enterprise). Direct investment enterprises comprise branches (unincorporated enterprises), subsidiaries (incorporated enterprises that are more than 50 per cent owned by the direct investor), and associates (incorporated enterprises that are between 10 and 50 per cent owned by the direct investor). Specific examples are given in box 12.2. A direct investor may be an individual; an incorporated or unincorporated private or public enterprise; an associated group of individuals or enterprises; a government or a government agency; an estate or trust; or an international organisation which has an investment of 10% or more in a direct investment enterprise in an economy other than the one in which the direct investor resides. An enterprise that has significant long-term operations in more than one economy is divided into separate entities in each economy. These entities are always in a direct investment relationship: the head office constitutes the direct investor, and its branches constitute the direct investment enterprises.

"The benefits that direct investors expect to derive from a voice in management are different from those anticipated by portfolio investors having no significant influence over the operations of enterprises. From the viewpoint of direct investors, enterprises often represent units in a multinational operation, the overall profitability of which depends on the advantages to be gained by deploying the various resources available to the investors in units located in different economies. Direct investors are thereby in a position to derive benefits in addition to the investment income that may accrue on the capital that they invest (e.g. the opportunity to earn management fees or other sorts of income). Such extra benefits are likely to be derived from the investors’ associations with the enterprises over considerable periods of time. In contrast, portfolio investors are primarily concerned about the safety of their capital, the likelihood of appreciation in value, and the return generated. Portfolio investors will evaluate, on a separate basis, the prospects of each independent unit in which they might invest and may often shift their capital with changes in these prospects, which may be affected by short-term developments in financial markets." (BPM5, p. 86.)

	12.2. EXAMPLES OF DIRECT INVESTMENT RELATIONSHIPS
	The illustration shows the direct investment relationships (if any) with Enterprise N, which is in one economy, of the other enterprises shown, which are in one or more other economies.
	In this illustration, enterprises A, B, C, D, E, F, K and L are considered to be in direct investment relationship with N. Enterprises G, H and J are not. Under the definition of direct investment: A is a subsidiary of N; B is a subsidiary of A and therefore a subsidiary of N, even though only 33 per cent (60% x 55%) of B’s capital is indirectly attributable to N; C is an associate of B and therefore an associate of N through its subsidiary B, even though only 4 per cent of C’s capital is indirectly owned by N; D is an associate of N; E is a subsidiary of D and, therefore, an associate of N, even though only 6 per cent of E’s capital is indirectly owned by N; F is an associate of N; G is an associate of F, but not of N; F is only an associate of N; H is neither a subsidiary nor an associate of N; J is a subsidiary of H, but neither a subsidiary nor an associate of N; K is a subsidiary of N; L is a branch of K, and thus a branch of N. It is also important to note that these enterprises are considered to be in direct investment relationships with each other. Therefore, for example, transactions between company E and company K represent direct investment transactions.
	Note: While the definition of direct investment appears relatively straightforward, there may be circumstances where judgement is required if a foreign investor exercises a significant influence in the management of an enterprise, which does not strictly conform to the direct investment definition. However, the impact of enterprises not adhering to the definition would be minor, and to date no attempt has been made to determine whether enterprises reporting in the Survey of International Investment strictly comply with the definition of direct investment. Source: IMF Balance of Payments Compilation Guide, p. 151.

• direct investment in Australia is much larger than Australia’s direct investment abroad, owing to Australia’s traditional reliance on foreign direct investment as a source of finance;

• equity capital and reinvested earnings make up the largest part of direct investment; and

• other capital is positive for Australia’s direct investment abroad, which reflects the fact that the claims of overseas affiliates exceed their liabilities to their Australian direct investors.

	12.3 DIRECT INVESTMENT TRANSACTIONS AND LEVELS, 1996-97
			Financial transactions			Position at end of period
			Direct investment abroad	Direct investment in Australia		Direct investment abroad	Direct investment in Australia
			$m	$m		$m	$m
	Direct investment		-5,908	11,282		-67,766	151,115
	Equity capital and reinvested earnings		-6,391	11,439		-68,162	127,982
	Other capital		483	-156		396	23,133
		Claims	338	-645		-4,607	-4,152
		Liabilities	144	489		5,003	28,286
	Note: Consistent with the use of sign elsewhere in the balance of payments, an increase in Australian investment abroad is shown by a negative sign, while an increase in direct investment in Australia is shown without sign (positive). Source: Tables 26, 32 and 33 from Balance of Payments and International Investment Position, Australia, March quarter 1998 (Cat. no. 5302.0).