Each country requires capital for its economic growth and the funds cannot be raised alone from its internal sources. Foreign direct investment (FDI) and foreign portfolio investment (FPI) are the two ways in which foreign investors can invest in an economy. FDI connotes a cross-border investment, from a resident or a company domiciled in one country, to a company based in another country, with the aim of establishing a lasting interest in the economy.
In reverse, FPI connotes a path to funds in a nation, where foreign residents can purchase securities from the country's stock or bond market.
Both FDI and FPI involve the acquisition of a stake in an enterprise domiciled in another country. But, these two differ, in terms of holdings, terms, degree of control, etc. Come on, let's understand the difference between FDI and FPI, in detail.
|Sense||Foreign direct investment refers to the investment made by foreign investors to obtain substantial interest in the company located in another country.||When an international investor invests in the passive holdings of a company from another country, i.e. investment in financial activity, known as FPI.|
|Role of investors||Active||Passive|
|Degree of control||tall||Much less|
|Term||Long term||Short term|
|Project management||Efficient||Comparatively less efficient.|
|Investment in||Material goods||Financial assets|
|Entry and exit||Hard||Relatively easy.|
|Results in||Transfer of funds, technology and other resources.||Capital inflows|
Definition of FDI
Foreign direct investment (FDI) implies an investment made with the intention of obtaining a shareholding in an enterprise domiciled in one country by an enterprise located in another country. The investment may involve transfers of funds, resources, technical know-how, strategies, etc. There are several ways to create FDI, that is, to create a joint venture either through mergers and acquisitions or by creating a subsidiary.
The investment company has significant influence and control over the investee company. Furthermore, if the investing company obtains 10% or more of ordinary shares, the voting rights are granted together with the participation in the management.
Definition of FPI
Foreign portfolio investments (FPI) refer to the investment made in the financial activities of an enterprise, based in a country by foreign investors. This investment was made for the purpose of obtaining short-term financial gain and not for obtaining significant control over the managerial operations of the company.
The investment is made in the company's securities, i.e. shares, bonds, etc. For which foreign investors deposit money into the host country bank account and purchase securities. Usually, FPI investors opt for highly liquid securities.
Key differences between FDI and FPI
The difference between IDE and FPI can be clearly traced for the following reasons:
- The investment made by international investors to obtain a substantial interest in the company located in another country, a direct foreign investment or an FDI. Investment in passive participations such as shares, bonds, etc. Of a foreign country enterprise by foreign investors known as a foreign portfolio investment (FPI).
- FDI investors play an active role in the management of the investee company while FPI investors play a passive role in the foreign company.
- Since FDI investors acquire both ownership and management through investments, the level of control is relatively high. Conversely, in FPI the lower degree of control since investors only get the ownership right.
- FDI investors have a substantial and long-term interest in the firm than in the case of FPI.
- FDI projects are managed with great efficiency. On the other hand, FPI projects are managed less efficiently.
- FDI investors invest in financial and non-financial assets such as resources, technical know-how and securities. Unlike FPI, where investors only invest in financial assets.
- It is not easy for FDI investors to sell the acquired stake. Unlike FPI, where the investment made in financial assets that are liquid, they can be easily sold.
The entry and exit of the IDE are very difficult, while not so with the FPI. An investor can easily make the investment of the foreign portfolio. FDI and FPI are two methods through which it is possible to introduce foreign capital into the economy. This investment has both positive and negative aspects, since the inflow of funds improves the position of the balance of payments while the outflow of funds in the form of dividends, royalties, imports, etc. Comporter reducing the balance of payments.