Key differences between FDI and FPI

Most people know that FPI and FDI pertain to foreign investment, but fewer know that they are not interchangeable.

Aug 18, 2019 09:08 IST India Infoline News Service

Post Budget FY19-20, you surely would have heard the words “FPIs” being used, in context of the stock markets, in print media, or financial news channels or social media platforms. And you definitely wouldn’t have missed the heated discussions on news channels about the pros and cons of Foreign Portfolio Investment (FPI) vs. Foreign Direct Investment (FDI). Most people know that FPI and FDI pertain to foreign investment, but fewer know that they are not interchangeable. 

In order to understand these concepts better, let us first look at the two terms individually and then go on to understanding the differences which make them unique and distinctive.
 
FDI- Foreign direct investment or FDI pertains to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants, or equipment. In other words, FDI connotes a cross-border investment, by a resident or a company domiciled in a country, to a company based in another country, with an objective of establishing a lasting interest in the economy.  

The investment may result in the transfers of funds, resources, technical know-how, strategies, etc. There are several ways of making FDI i.e. creating a joint venture or through merger and acquisition or by establishing a subsidiary company. The investor company has a substantial amount of influence and control over the investee company. Moreover, if the investor company obtains 10% or more ownership of equity shares, then voting rights are granted along with the participation in the management. For example, Walmart acquiring 77% stake in India’s biggest online retailer, Flipkart, is an FDI investment. 
 
FPI: Foreign Portfolio Investment or FPI refers to the investment made in the financial assets of an enterprise, based in one country, by the foreign investors. In other words, FPI involves the purchase of securities that can be easily bought or sold. The intent with FPI is generally to invest money into another country's stock market with the hope of generating a quick return. Such an investment is made with the aim of making short term financial gain and not for obtaining significant control over managerial operations of the enterprise. These include investments via equity instruments (stocks) or debt (bonds) of a foreign enterprise which does not necessarily represent a long-term interest.       

                                                                       
FDI vs FPI – Key differences: While FDI and FPI both involve putting money into a foreign country, the two investment options differ considerably. Given below are some of the key differences between the two:
                                                                       
FDI FPI
Key Differences
Active Investment Passive Investment
Direct Investment Indirect investment
Long term capital Short Term capital
Invests in financial & non-financial assets Invests only in financial assets
Ownership and managerial control Only ownership
Stable Volatile
Entry & exit barriers exist Entry & exit very easy
 
  • With FDI, investors are able to exert control over their investments and are typically actively involved in the management of the companies they invest in. Conversely, in FPI the degree of control is less as the investors obtain only ownership right. Therefore, they do not get a say in how their investments pan out because they're not actively involved in the management or operations of the companies that they're invested in.
  • One of the most important distinctions between portfolio and direct investment to have emerged in the era of globalization is that portfolio investment can be much more volatile. Changes in the investment environment in a country can lead to swift changes in portfolio investment. In contrast, FDI is more difficult to pull out or sell off as it implies a controlling stake in a business, and often connotes ownership of physical assets such as equipment, buildings and real estate.
  • FDI investors invest in financial and non-financial assets like resources, technical know-how along with securities. This is contrary to FPI, where investors invest only in financial assets.
  • For an economy as a whole, FDI creates productive assets by investing in factories, machinery & skill and superior technology. In that sense, FDI brings in long-term capital for an economy. FPI doesn’t aid productive asset creation directly. It is just a financial investment. The FPI investment pours funds generally into capital or bond markets for a short period of time, usually enough to make profits. Its destination period is small and its funds are generally considered short term capital.

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