Weakened private equity activity reduces the overall amount of FDI in host economies, as such equity can supplement investments by TNCs. In host developing countries, private equity can contribute to the development of a capital market and an equity culture. Such a culture is lacking in many developing country markets where familyowned and State owned businesses are dominant.
The development of an equity culture can bring in additional capital and lower the cost
of funds. From this point of view, the decrease in FDI by private
equity funds in 2008 (table I.3) reduces the scope of development
of equity markets. However, as long as this slowdown is due to the
reduced availability of credit and its increased cost, rather than to
tightened regulations, private equity funds are likely to rebound.
Box I.1. Revision of the UNCTAD database on cross-border M&As
Starting with this year's WIR, data on cross-border M&As have been revised to cover all cases for which at
least one of the four entities (immediate acquiring company, immediate target company, ultimate acquiring company
and ultimate target company) is located in an economy other than that of the other entities. Previously, and including
the data reported in WIR07, cross-border M&As were defined as those deals in which the target company was not
located in the same country as the ultimate acquiring company.
The data therefore excluded the following kinds of deals:
(a) deals where the acquiring domestic company is located in the same country as the acquired foreign company
(referred to as case 2 in annex table A.I.4); and
(b) deals where the ultimate acquiring foreign company is located in
the same country as the acquired domestic company (referred to as case 9).
These cases were not considered "crossborder" in the M&Amp;A database, even if the economy of the ultimate target company was different from that of the
ultimate acquiring company (case 2). (For a brief description of all 11 cases, see annex table A.I.4.) Indeed, there were
many transactions categorized under case 2 in Latin America, and these have become an important element of the FDI
trend in the region (see section on Latin America and the Caribbean in Chapter II).
International standards for reporting FDI data, as compiled for balance of payments purposes, recommend that
data be compiled also on the basis of ultimate host and home economy in addition to those on the immediate basis
(paragraph 346 of OECD's Benchmark Definition of FDI).a In reality, compilation based on immediate host and home
economy is a common practice used in many countries. All transactions between the direct investor (parent firm) and
the direct investment enterprise (foreign affiliate) are recorded as either assets or liabilities in balance of payments
transactions. Following this recommendation, on the ultimate host/home country basis, although they are undertaken
within the same economy, the deals under cases 2, 3, 7 and 8 in annex table A.I.4 should be reflected in FDI flow data.b
In the UNCTAD cross-border M&A database, all transactions are now recorded on the basis of ultimate host (target)
and acquiring (home) country. Thus, for example, a deal in which an Argentine domestic company acquired a foreign
company operating in Argentina, in the new system this deal is recorded showing Argentina as the acquiring country,
and the foreign country is the target country.
The data on cross-border M&As presented in this WIR are not strictly comparable to those presented in previous
WIRs, as there are significant differences in the total number and value of the deals included under the old and new
methodologies.
Source: UNCTAD.
a "FDI statistics should be compiled by immediate partner country using the debtor/creditor principle... (I)n addition, it is strongly encouraged
that supplemental inward FDI position statistics be compiled on an ultimate investing country basis" (OECD, 2008a, paragraph 346).
b Value of deals under case 2 would be recorded as negative FDI inflows to the host economy (i.e. the economy where the acquired firm
is located or from which the sale takes place), while those under cases 3 and 8 would be recorded as (positive). In case 7, as the ultimate
host and home country is the same, the value of the deal would be recorded as both divestment and new investment in this economy, and,
overall, the net impact on the level of FDI in the host/home country is null.