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A nation needs funds to ensure the growth of its economy. FPI and FDI are the international sources for extensive capital growth. Let’s understand the difference between both
The growing economy is encouraging organisations to do business internationally. It gives them access to various investment options. The two major options are - Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI).
In simple words, FPI and FDI involve investing in a foreign country. It is about the flow of capital from one nation to another. In these investments, foreigners get ownership interest. They could also be involved in the business’s operations or systems.
To gain a better understanding of the two, let’s learn about FDI and FPI differences.
What is a Foreign Direct Investment?
Foreign direct investment refers to building business interest directly in another nation. For example, building a manufacturing business and establishing warehouses. It is important to understand both terms in detail to have a clear idea of FPI and FDI.
Foreign direct investment involves long-term investment in a foreign country’s economy. It requires a comparatively higher amount of investment. Hence, FDI is generally done by multinational companies. Venture capital firms and large institutions can also undertake FDI.
The nature of this investment involves creating a manufacturing facility. It is comparatively difficult to pull out the investment. Hence, FDI is undertaken with the intention of building a profitable business. Its operations are conducted for an indefinite period. Plus, it also involves more commitment and risk. It is the major FDI and FPI difference.
Examples
Listed below are some major examples of the latest FDI in India –
- USD 500 million raised by Ed-Tech firm Byju's. The investment took place in September 2020 by Silver Lake. It is a US VC and equity firm.
- Unacademy, in September 2020, raised USD 150 million. SoftBank Group of Japan led the funding round.
- Google took a 7.73% share of ‘Jio Platforms' of Reliance's. It was one of the biggest deals, valued at USD 4.5 billion.
Current FDI Trends in India
The government has eased the foreign investment regime. It has also built an excellent business environment. As a result, the country benefited from a significant sum of foreign capital flows.
In recent years, the Government of India has introduced various initiatives. The major ones are relaxing FDI norms in public sector undertakings (PSU) and the defence sector. There have been reforms in the telecom sector. Also, the oil refineries sector and power exchanges have seen reforms. Initiatives have been taken for stock exchanges as well.
What is a Foreign Portfolio Investment?
Foreign portfolio investment refers to investing in a country’s financial assets. Generally, the assets include bonds and stocks. This investment is comparatively less favourable. The portfolio investments are quickly sold off.
It is a good short-term option for making money. Both FPI and FDI offer good returns. The time frame of portfolio investment is short. Hence, investment can make quick profits. Additionally, securities are traded easily, so portfolio investments have better liquidity. They can be sold easily in comparison to direct investments.
Current FPI Trends in India
Foreign portfolio investors are into equity selling in Indian markets. It is being practised since October 2021. Advanced nations have tough monetary policies and this elevated demand for commodities with dollar-denomination has resulted in continuous money outflow from Indian markets. Equity valued at ₹121,439 crores was sold by foreign portfolio investors in India in 2022.
Differences Between FDI and FPI
Here are the differences between foreign direct investment and foreign portfolio investment:
Category
|
Foreign Portfolio Investment |
Foreign Direct Investment |
|
Nature of Investment |
Indirect investment such as bonds or stocks and other financial assets of a foreign country market. |
Direct control and business ownership in other countries. |
|
Control and influence |
No influence or control over the operations of the company. |
Allows good influence control and influence over the management and operations of the business. |
|
Motive |
Majorly driven by short-term returns and financial gains. |
Strategic interests or seeking market access and long-term growth |
|
Risk factor |
It is subject to fluctuations and market volatility in prices of assets. |
Susceptible to risks of the host country, such as regulatory, economic, and political factors. |
|
Involvement in company operations |
Passive form of investment. There is no involvement in the operations of the company |
Investor(s) are actively involved in the operations of the company. They may also have a say in the decision-making. |
|
Investors Type
|
|
Active |
|
Involvement |
Offers short term gains. Investors don’t involve themselves actively in the management activities. |
Facilitates with Long term interests. Involvement in ownership and management control. |
|
Project Management |
Project management is less efficiently managed.
|
Project management is efficient. |
|
Assets Type |
Investment in financial assets of another country such as bonds, stocks, and ETFs. |
Investment in physical stakes and assets in other companies. It could be both Non-Financial and financial assets). |
|
Ease of Entry and Exit |
Relatively easy |
Difficult |
|
Purpose
|
The inflow of capital to the foreign nation. |
Transfer of funds, resources, and technology to the foreign nation. |
Conclusion
Both FDI and FPI are the most efficient ways of investing in another country. The former gives investors the opportunity to have financial assets, while the latter provides investment prospects to control interest.
However, note that FDI is an option for investors with a high-net-worth. Institutional investors can also take advantage of it. Further, retail investors can opt for bonds or shares investment.
