Abstract

Foreign Direct Investment (FDI) are financial cross-border investments in which an investor in one economy makes a direct investment in an enterprise in another economy with the objective of acquiring a lasting interest in the investee company. Lasting interest implies that (i) there is a long-term relationship between the investor and the investee company and (ii) the investor has some say over the conducted policy. In practice, this means that the investor must hold at least 10 per cent of the company’s voting rights.

While traditionally FDI is measured on an immediate basis (based on the foreign country where the firm that is investing resides and vice versa), FDI measures on an ultimate basis give better insights in the financial connections in the global economy. There is an increasing interest in direct investment by ultimate investing economy (the country where the investment ultimately originates from), as this looks through complex financing and ownership structures of multinational enterprises and through special purpose entities (SPE’s) which have no or little real links to the economy. This gives further insight in who ultimately controls the investments and is thereby a better measure for the financial connections between economies than immediate FDI figures.

In our research we determine the geographical distribution of ultimate investors for inward FDI in The Netherlands. The Netherlands has one of the largest FDI positions in the world with an outward FDI position of EUR 4.800 billion and an inward FDI position of EUR 3.800 billion. The United States, United Kingdom and Luxemburg are The Netherlands’ top three partner countries for inward FDI investment based on the country of the immediate investor. Inward FDI from those countries amounts to 25%, 14% and 11% of total inward FDI positions respectively. Our research shows how these numbers change based on the ultimate investor. Since Luxembourg is a conduit country just as The Netherlands, the inward FDI from Luxembourg is significantly smaller when analyzed by the geography of the ultimate investor presentation, while other countries become more important.

Furthermore, based on our analyses of the ultimate investing economy we also give an indication of the extent of pass-through and round tripping in The Netherlands. Since pass-through in an economy is carried out by non-resident ultimate investors, a breakdown of the outward FDI position based on the country of the ultimate investor gives an indication of the amount of pass-through funds. The amount of round tripping is determined by inward investments of resident ultimate investors.