Irregularities in the data saw the withdrawal of this year's World Bank Doing Business report. Investment Monitor delves into the world of FDI data to assess whether the numbers can be trusted.
The withdrawal of the World Bank’s Doing Business report this year sparked alarm among investors and policymakers the world over. The bank is currently investigating ‘irregularities’ in recent editions that affected the rankings of China and Saudi Arabia, among others.
The level of concern that this move provoked says much about the index’s widespread influence. However, the furore over Doing Business obscures much more fundamental issues with the data that is used to understand foreign direct investment (FDI).
The messy realities of data collection
The IMF’s balance of payments statistics serve as the foundation for countless analyses, investment decisions and policy initiatives. A considerable portion of what we think we know about the global economy is drawn from these numbers.
Any accountant will state that economic phenomena do not always fit neatly into our preferred categories. The collection of such data therefore requires many small, sometimes arbitrary, decisions about how to measure and categorise messy realities.
This can be a problem for data that is collected by many different institutions, each of which may have its own way of making these decisions. FDI statistics are no exception – although compiled by international organisations they are typically gathered at the national level or below.
Some data is also just better than others. The UK collects its data through a census of all relevant firms, while Sweden collects data from a representative sample – a cheaper method, but one that can introduce inaccuracies. About one-fifth of the IMF’s inward and outward FDI estimates make use of surveys.
Economists are broadly aware of these issues. When asked to estimate the margin of error for the IMF’s data on FDI inflows, researchers Lukas Linsi and Daniel Mügge found that most economists came up with an answer of about 5%. This would imply that a recorded FDI inflow of $100bn could be off by up to $5bn in either direction.
While this might sound like a lot – especially to those basing decisions or models on small shifts in FDI flows – Linsi and Mügge found that is, in fact, a monumental underestimate.
One way of measuring the inaccuracy of FDI statistics is to compare the flows recorded by the investor country with those recorded by the host country. In theory, the inward investment that Mozambique reports receiving from China should equal the outward investment that China reports sending to Mozambique. Differences between these records, known as ‘bilateral asymmetries’, indicate a problem.
The scale of these asymmetries far outstrips the modest predictions offered by Linsi and Mügge’s economists. In 2016, the UK reported a total outward FDI stock of $1.49trn. Countries hosting UK investments, however, valued these at $2.46bn – a difference of 65%.
