Foreign Direct Investment VS Foreign Portfolio Investment
Capital plays a vital role in every country’s economic growth, but the capital requirement of most countries cannot be produced alone from its internal source, so they seek foreign investors to provide the needed fund.
Foreign direct investment (FDI) and foreign portfolio investment (FPI) are two important ways through which overseas investors can invest in an economy. FDI refers to a direct investment by a foreign investor directly to the productive assets of another country, with a goal of building a lasting interest in the economy.
On one hand, FPI means investing by investors in financial assets such as stocks and bonds of a company domiciled in another country.
Both FDI and FPI include the process of acquiring a stake in a company that is located overseas. They are the most well-sought type of foreign capital by the developing world. However, these two differ in some respect and this article will help you understand the difference between the two.
Foreign Direct Investment refers to an investment made by a company to another company located in some other countries. The investment aims to gain an ownership stake in the company where investment is made. It may result in the relocations of funds, resources, technical knowledge, strategies, etc. There are numerous ways to execute FDI, such as making a joint venture or through merger and acquisition or by building a subsidiary company.
The company that invests has a considerable amount of influence and control over the company receiving the investment. Additionally, if the investor gains 10 percent or more ownership of equity shares, then the right to vote and participate in the management is granted.
Foreign Portfolio Investment implies an investment made by the foreign investors in the financial assets of a company situated in a certain country. The investment is done in pursuit of obtaining short-term financial gain and not for gaining significant control over managerial operations of the company. Additionally, the investment is made in the securities of the company, such as stock, bonds, etc. for which the foreign investors deposit money in the investee’s bank account and purchase securities. FPI investors commonly go for securities that are highly liquid.See also Ways to Help You Identify Good Investment Opportunities
Main Differences Between FDI and FPIFDI and FPI difference can be drawn properly on the following factors:
1. The investment made by the overseas investors to gain a significant interest in the company domiciled in some other country is called Foreign Direct Investment (FDI). The investment made in financial assets like stocks, bonds, etc. of the company of a foreign country by the international investors is referred to as a Foreign Portfolio Investment (FPI).
2. Investors in FDI takes an active role in the management of the company where investment is made whereas investors in FPI takes a passive role in the international company.
3. The degree of control of FDI investors is relatively high because they obtain both ownership and management right through investment. On one hand, the level of control in FPI is less as the investors gain only ownership right.
4. Investors in FDI have a significant and long-term interest in the company is not the case of FPI.
5. Projects of FDI are managed with great competence. Conversely, the projects of FPI are less competently managed.
6. Investors in FDI invest in financial and non-financial assets like resources, technical knowledge along with securities. In contrary, investors in FPI invest only in financial assets.
7. Investors in FDI cannot easily sell out the acquired stake. As opposed to FPI, where investment is made in financial assets which are liquid, they can be sold easily.See also Some Warning Signs of a Bad Investment
If you are a retail investor who increasingly invests overseas, you should be well aware of the differences between FDI and FPI, since countries with a high level of FPI can face increased market volatility and currency mayhem during times of uncertainty.
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