WIREDGOV

Recent studies have suggested that companies re-domiciling their headquarters overseas – a process sometimes referred to as ‘financial engineering’ – can have an effect on countries’ Foreign Direct Investment (FDI) statistics, in particular, a fall in net FDI earnings and investment position. However, a new paper published recently by the Office for National Statistics has found little evidence that companies re-domiciling their headquarters overseas has been having an adverse effect on UK FDI statistics in recent years.

The report finds that while UK FDI liabilities have risen over recent years, 72.1% of the increase between 2007 and 2014 is attributable to traditional transaction flows such as mergers and acquisitions. The remainder of the increase is attributable to non-transactional effects such as revaluations and exchange rate effects. To look in more detail, the study examined some of the companies with the largest FDI liabilities in the UK to see if they had re-domiciled and effect that might have. This approach indicates that 92.0% of the rise in FDI liabilities between 2007 and 2014 is attributable to non-financial engineering activities, with the remainder accounted for by unclassified non-transactional effects that might include financial engineering.

The paper also examined which particular regions of the world were accounting for the increase in FDI liabilities. If financial engineering explained a notable proportion of the increase in FDI liabilities, one would expect the increases to be from specific regions – namely, financial centres. However, the paper shows that increases in FDI liabilities since 2007 appear to have been broad-based, suggesting a widespread increase in appetite for UK-based investment.

Commenting on the findings, ONS statistician Michael Hardie said: “Our research suggests that financial engineering isn’t having a large adverse effect – at least on the foreign direct investment figures. Given the evidence suggests that financial engineering is not having a major impact on FDI, one can infer that the impact on aggregate statistics such as Gross Domestic Product or Gross National income would be very small.”

Background Notes

1. The report is on the ONS website at:https://www.ons.gov.uk/releases/ananalyticalstudyintothepotentialimpactoffinancialengineeringonukforeigndirectinvestment

2. Foreign Direct Investment (FDI) refers to cross-border investments made by residents and businesses from one country into another, with the aim of establishing a lasting interest in the company receiving the investment. Ownership of at least 10% of voting power is the basic criterion used.

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5. National Statistics are produced to high professional standards set out in the Code of Practice for Official Statistics. They undergo regular quality assurance reviews to ensure that they meet customer needs. They are produced free from any political interference. © Crown copyright 2016.