. /.WORLD TRADE
ORGANIZATIONWT/WGTI/W/61
3 November 1998
(98-4267)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM THE IMF
The following communication, dated 15 October 1998, has been received from the IMF in
response to a request made by the Working Group at its meeting of 1-2 October 1998 for informationon the IMF definition of foreign investment.
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Definition of Foreign Investment
1
The balance-of-payments is a statistical statement that systematically summarizes, for a
specific time-period, the economic transactions of an economy with the rest of the world.Transactions, for the most part between residents and nonresidents, consist of those involving goods,
services, and income, those involving financial claims on, and liabilities to, the rest of the world;  and
those classified as transfers.  One of the key underlying principles of balance-of-payments is the
concept of the centre of economic interest that is used to determine the residents and nonresidents of
an economy.  Thus, in balance-of-payments, foreign investment refers to investment made by
individuals or enterprises that have their centre of economic interest in an economy other than the
economy in which they invest.
Under the definitions and classifications of international accounts presented in the IMF
Balance-of-Payments Manual, foreign investment is classified into the following components:
(i) direct investment;  (ii) portfolio investment;  and (iii) other investment.
Direct investment
Direct investment  is the category of international investment that reflects the objective of a
resident entity in one economy obtaining a lasting interest in an enterprise resident in another
economy.  (The resident entity is the direct investor and the enterprise is the direct investmententerprise).  The lasting interest implies the existence of a long-term relationship between the direct
investor and the enterprise and a significant degree of influence by the investor on the management of
the enterprise.  Direct investment  comprises not only the initial transaction establishing the
relationship between the investor and the enterprise but also all subsequent transactions between them
and among affiliated enterprises, both incorporated and unincorporated.
Direct investment capital is capital provided by a direct investor to a direct investment
enterprise or received by a direct investor from a direct investment enterprise.  The components of
                                                     
1 For a fuller definition, see Balance-of-Payments Manual, International Monetary Fund, Fifth Edition,
1993.WT/WGTI/W/61
Page 2
direct investment capital transactions are equity capital, reinvested earnings, and other capital
associated with various intercompany debt transactions.
Portfolio investment
Portfolio investment  includes, in addition to equity securities and debt securities in the form
of bonds and notes, money market instruments and financial derivatives such as options.
Excluded are any of the aforementioned instruments included in the categories of direct
investment  and reserve assets .2
The major components of portfolio investment which are classified under assets and
liabilities, are equity securities and debt securities.  Both are usually traded (or tradable) in organized
and other financial markets.  Debt securities are subdivided into bonds and notes, money market
instruments, and financial derivatives that include a variety of new financial instruments.
Equity securities cover all instruments and re cords acknowledging, after the claims of all
creditors have been met, claims to the residual valu es of incorporated enterprises.  Shares, stocks,
participants, or similar documents (such as American Depositary Receipts) usually denote ownership
of equity.  Preferred stock or shares, which also provide for participation in the distribution of the
residual value on dissolution of an incorporated enterprise, are included.
Debt securities cover (i) bonds, debentures, notes, etc;  (ii) money market or negotiable debt
instruments;  and (iii) financial derivatives or secondary instruments, such as options, that usually do
not extend to actual delivery and are utilized for hedging of risks, investment, and trading purposes.
Other investment
Other investment  is a residual category that includes all financial transactions not covered in
direct investment, portfolio investment  or reserve assets .
As is the case with portfolio investment , assets and liabilities for other investment  are
classified primarily on an instrument basis.  The sectors of domestic creditor or debtor – the secondary
basis for the classification – are monetary authorities, general government, banks, and other sectors.
While the relative importance of types of investment differs considerably among economies,
the types reflect most of the financial instruments and channels utilised for the acquisition of assets
and incurrence of liabilities – other than for direct investment, portfolio investment  and reserve assets .
The instrument classification comprises trade credits, loans (including the use of Fund credit andloans from the Fund), currency and deposits (both transferable and other), and other assets and
liabilities (for example, miscellaneous accounts receivable and payable).
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2 Reserve assets  is an important component of balance-of-payments statistics and an essential element
in the analysis of an economy's external position.  Reserve assets  consist of those external assets that are readily
available to and controlled by monetary authorities for direct financing of payments imbalances, for indirectly
regulating the magnitude of such imbalances through intervention in exchange markets to affect the currency
exchange rate and/or for other purposes.