Recently, it was raised that the FDI figure published by United States Conference on Trade and Development (Unctad) was RM13.7 billion in 2006 and when comparing the figure posted by our Ministry of International Trade and Industry of RM 20.2 billion, differed by about RM6.5 billion. It was suggested that the latter held little credibility and 'merely represented the costs of projects' instead of tallying the 'actual flow of foreign equity'.

Is this an act of irresponsibility on the part of the government, cooking up the figures as suggested? This lies once again in the methodology employed in the calculation of the two figures.

Unctad inflows and outflows compute the actual flow of funds deemed for use in the manufacturing sector only. Likewise, MITI's figures also take into account the manufacturing sector (excluding the oil and gas sector, and the services sector). Hence, foreign funds flow into the capital markets as well as foreign investments by the foreign banks and insurance companies are not included in the equation of either of the figures. As far as the manufacturing sector is concerned, the bases are tallied. Why the discrepancy?

The difference is what actually gets captured in the figures. When multinationals (MNC) invest in a host country, very few pour in actual funds in terms of cash. In the simplest form, a share swap is arranged. More often than not, due to the sophistication of the current global financial system, when an MNC conducts a merger and acquisition (M&G) between the parent company and the company set up locally, it is done through a share swap.

With the shares of the parent company - due to its good ratings or some form of back-to-back guarantees from the parent company - the local company then pledges the parent company's shares with a local bank for its working capital and purchase of equipment (capital expenditure). This not only reduces its exposure to foreign exchange risks but it also eases administrative and regulatory burdens by dealing with a local bank.

As they say it's then 'all in the family'. The local bank chosen is most likely to be a foreign- owned bank which is familiar with the business model, credit assessments and business activities of the investing parent company back in the US (for example). In this case, there is no actual capital inflow to the host nation, and as such is not captured in FDI inflows under Unctad's methodology.

Of course, the above example is a straightforward swap. Usually, a M&A would involve an even more complex combination of share swaps, series of credit arrangements, derivatives, hedges and, maybe actual cash.

There is no hard and fast rule for any country to adhere to some 'international guideline' of measuring foreign direct investment. But a call to any research house will tell you that the project basis approach is used in several emerging countries including China. Project approach is also the method used when assessing the 'buy-sell' of a stock. You cannot say that just because no actual cash flows from the parent company to the local set-up, that the project does not exist.

Project approach is a very simple and yet easy to comprehend. As far as the country is concerned, foreign direct investment culminates as foreign investment so long as it is capital expenditure expended by a company that has foreign ownership. Be it capital expenditure borrowed locally or profits ploughed back into the local operations.

As in most countries including the US, a foreign entity investing locally is required to report the amount of capital expenditure made for whatever project. This is irrespective of the funds being internally generated or locally raised.

Now, there is what I term as the 'old boys' club system', a close-knit foreign investment fraternity in Malaysia. This 'club' is always in communication with each other, and usually comprises foreign CEOs. They sit on the boards of the same chambers and associations and rub shoulders with their own respective country's diplomats and ambassadors. They are usually either clients or suppliers of each other's business interests. That is, a business micro-ecosystem of the big companies back home.

It only takes a quick arithmetic by those around this table and everyone pretty much knows who has invested how much and in what for that year. Don't you think they would know if a country had cooked up the FDI numbers (even if we tried)? A simple survey among the major foreign chambers of commerce will give you a pretty good estimate that is closer to MITI's numbers than Unctad's.

The writer is director, Institute of Strategic Analysis and Policy Research (Insap).