Investment in which a resident of one country obtains a degree of influence over the management of a business enterprise in another country. The criterion used to define direct investment is ownership of at least 10 percent of the voting securities of an incorporated business enterprise or the equivalent interest in an unincorporated business enterprise. U.S. direct investment abroad represents the ownership or control, directly or indirectly, by one U.S. resident (U.S. parent) of at least 10 percent of a foreign business enterprise, which is called a foreign affiliate. Foreign direct investment in the United States represents the ownership or control, directly or indirectly, by one foreign resident (foreign parent) of at least 10 percent of a U.S. business enterprise, which is called a U.S. affiliate. For guidance on how to apply the direct investment criterion in the case of a limited partnership, see “LIMITED PARTNERSHIPS AND DIRECT INVESTMENT” below.
Direct investment transactions and positions can be in the form of equity or debt between affiliated entities. These transactions and positions are to be reported on the direct investment surveys conducted by the Bureau of Economic Analysis (BEA) and excluded from TIC reports, with two exceptions: 1) debt between selected affiliated financial intermediaries and 2) equity in and debt with certain private funds.
Debt between selected affiliated financial intermediaries is not classified as direct investment because it is not considered to be so strongly connected to the direct investment relationship.
The financial intermediaries covered by this case are:
- deposit-taking corporations;
- securities brokers and dealers;
- financial and bank holding companies;
- investment funds; and
- other financial intermediaries, except insurance companies and pension funds.
If both the U.S. entity and the affiliated foreign entity are financial intermediaries, all of their cross border debt positions—both affiliated and unaffiliated—are to be reported on TIC surveys and excluded from BEA direct investment surveys.
Insurance companies and pension funds are financial intermediaries that are not covered by this exception to the direct investment definition and their debt positions with their affiliated entities are part of direct investment and reported to BEA. Insurance companies and pension funds should only report debt positions with unaffiliated foreign firms on TIC surveys.
Under the exception for private funds, investments by U.S. entities of a 10 percent or more voting interest in a foreign private fund, and investments by foreign entities of a 10 percent or more voting interest in a U.S. domiciled private fund should be reported on TIC surveys and are not required to report on BEA direct investment surveys if they meet BOTH of the following criteria:
- The private fund does not own, directly or indirectly through another business enterprise, an “operating company” – i.e., a business enterprise that is not a private fund or a holding company— in which the U.S. or foreign parent owns at least 10 percent of the voting interest, AND
- If the private fund is owned indirectly (through one or more other business enterprises), there are no “operating companies” between the U.S. or foreign parent and the indirectly-owned private fund.
Transactions and positions associated with investments in private funds that meet these criteria should be reported on TIC surveys and not on BEA’s direct investment surveys.