What’s in a name? The many facets of investment Part II
One of the main sources for measuring investment flows is the Balance of Payment statistics, which are compiled by the Department of Statistics and Bank Negara Malaysia. These generally fall under two categories – portfolio and direct investment.
For example in financial markets, investment is the term used to describe the purchase of equity or debt securities with the money going towards supporting existing businesses. If the business grows, the value of the investment grows as well. These types of investment are called portfolio investment.
While portfolio investment does fall under the ambit of investment in the classical economic sense, it has to be recognised that in financial markets these types of transactions have a dual nature – when somebody is buying, somebody is also selling. So every financial market transaction is really a matched set of an investment and a divestment with no actual net increase in investment. Portfolio investments in Malaysia are not covered under the national accounts, but are covered under the balance of payments – but only investments (and divestments) made by foreigners.
A further complication is that, above a certain ownership threshold, portfolio investment is reclassified as direct investment. Direct investments are investments in corporate entities that cover things like new factories and new businesses. But if you buy a significant stake in a company or even buy it over entirely, it is also considered a direct investment and not a portfolio investment, irrespective of whether that company is listed on the stock exchange or not.
If the investor is a foreigner, these transactions are included under the FDI statistics; all cross-border mergers and acquisitions (M&A) activity are counted in as FDI. That’s one reason why countries with a highly developed financial market – such as Singapore, Hong Kong, the UK, and the US – tend to also have high FDI.
So you could have an increase in private direct investment and FDI that really does not involve an increase in the productive capacity of the country, but only a change in ownership. Worse, if a foreign company with an existing operation in Malaysia makes a profit and opts to keep it in Malaysia, that too is counted as FDI under the balance of payments even if it does not involve expanding production capabilities.
Thus an increase or decrease in FDI actually doesn’t say very much about investment in the productive capacity of a country. The type and category of FDI actually matters, and we should care about which kind we get. A high FDI level that is mostly M&A doesn’t always help in terms of improving productive capacity, and the long term growth of the economy.
We’ll look at investment as defined under the national accounts in Part 3 of this series.
The views expressed here are the personal opinion of the columnist.