Appendix A - A cautionary note on comparisons of foreign direct investment

Summary

Comparisons of foreign direct investment (FDI) should be regarded with great caution. Some argue that they should not be used at all due to significantly differing methodologies. An analysis of methodological problems suggests that overall comparisons are, at a minimum, less useful than measurements of the trends — which in most data sources show recent Japanese investment increasing at a rapid rate while U.S. investment in the Asia-Pacific region has been relatively stagnant during the past decade, especially as measured in constant dollars.

Japanese FDI data is based on notifications to the Japanese Government of intent to carry out investment approved by the host government, whereas U.S. data from the Department of Commerce's Survey of Current Business is based on estimated capital flows and equity positions of U.S. firms and foreign affiliates. Thus Japanese data tends to be anticipatory and the methodology tends to overstate Japanese investment when compared to U.S. investment as measured by the more conservative U.S. method. Host government estimates, which often are based on approvals of proposed investment, tend to overstate both Japanese and U.S. investment.

In what is probably an extreme case of understating U.S. investment compared with Japanese FDI, the U.S. Commerce Department valued U.S. investment in the People's Republic of China (PRC) as of 1988 at only US$310 million, versus US$2.6 billion in approved investment estimated by the Chinese Government. (Recent disinvestment in China has brought U.S. equity down to under US$300 million.) On the other hand, the Japanese Ministry of Finance estimate of US$2 billion in cumulative notified Japanese FDI as of 31 March 1989 is nearly the same as the Chinese estimate of US$2.1 billion.

Recipient countries vary widely in how they track foreign investment. Hong Kong doesn't keep overall data on foreign investment but conducts an annual voluntary survey on manufacturing investment — by admission an incomplete and imprecise process. The U.S. Survey of Current Business shows US$594 million invested in manufacturing in Hong Kong as of 1988, versus an original cost estimate of US$1.1 billion shown by the Hong Kong Government's annual report.