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.
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:
|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|
|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.