Foreign Portfolio vs. Foreign Direct Investment: What's the Difference? (2024)

FAQs

Foreign Portfolio vs. Foreign Direct Investment: What's the Difference? ›

FDI refers to the investment made by foreign investors to obtain a substantial interest in an enterprise located in a different country. FPI refers to investing in the financial assets of a foreign country, such as stocks or bonds available on an exchange.

FDI involves a long-term commitment to establish a business interest in the foreign country, while FPI is a short-term investment that aims to diversify investment portfolios and participate in the growth of foreign economies.

Foreign portfolio investment is the purchase of securities of foreign countries, such as stocks and bonds, on an exchange. Foreign direct investment is building or purchasing businesses and their associated infrastructure in a foreign country.

Which of the following is a difference between foreign portfolio investment (FPI) and foreign direct investment (FDI)? FPI does not entail the active management of foreign assets, whereas FDI entails hands-on management of foreign assets.

– FDI implies that foreign investors are directly investing in the productive assets of another nation. – On the other hand, there is no difference between FPI and FII. Foreign institutional investors (FII) are single investors of a group of investors that brings in foreign portfolio investments.

Investment in financial assets of a foreign nation, such as stocks or bonds listed on an exchange, is known as foreign portfolio investment (FPI).

A U.S.-based cellphone provider buying a chain of phone stores in China is an example. In a vertical FDI, a business acquires a complementary business in another country. For example, a U.S. manufacturer might acquire an interest in a foreign company that supplies it with the raw materials it needs.

Direct Investment implies financial capital invested by a person or company based in one nation into a company based in another. Portfolio investment examples are bonds, stocks, mutual funds, and depositary receipts are all types of investments that may comprise a foreign portfolio.

FDI allows the transfer of technology—particularly in the form of new varieties of capital inputs—that cannot be achieved through financial investments or trade in goods and services. FDI can also promote competition in the domestic input market.

What is the difference between FDI and portfolio investment UPSC? ›

Foreign Direct Investment refers to investments made by a company or individual from one country into a company or business in another country. Foreign Portfolio Investment refers to investments made by a foreign entity into the securities of a country, such as stocks, bonds, and mutual funds.

FPI disadvantages

Investors can gain substantially from exchange rate differences. Markets in any country are inherently volatile. Despite the fluid nature of FPIs, losses may pile up if funds are not withdrawn hastily.

Foreign direct investment (FDI) involves an individual or organization investing in a business abroad in exchange for significant control over the business. There are three types of foreign direct investment: vertical, horizontal, and conglomerate.

FDI investments are made over a longer term. Investors typically do not liquidate their assets and leave the country. FDI assets are even larger than FPI assets and are significantly less liquid.

FDI targets a particular company, but FII does not target a particular company. FII flows only into the secondary markets, while FDI targets the primary market. FDI is considered to the more stable than FII. FDI helps bring better management skills and technology, while FII only brings in the capital.

With the changes in rules, in case a foreign fund buys below 10% stake in a corporation, such an investment shall be considered as FPI irrespective of the route selected. On the other hand, in case the ownership of an FPI in a corporation crosses 10%, then such an investment shall be considered FDI.

Foreign portfolio investment gives investors an opportunity to engage in international diversification of portfolio assets, which in turn helps achieve a higher risk-adjusted return.

FEMA allows FPIs to invest in Indian securities such as equities, bonds, debentures, and mutual funds. FPIs can also invest in Indian companies through the primary and secondary markets. However, FPIs are not allowed to invest in Indian companies engaged in the agricultural sector or plantation activities.

However, some of the world's most productive firms, especially in the electronics industry (e.g., Apple, Microsoft, Nokia, Hewlett-Packard)¹ carry out international outsourcing intensively and operate almost no FDI activities in launching their innovative products (e.g., iPod, game consoles, cell phones and notebook ...

Horizontal direct investment is perhaps the most common form of direct investment. For horizontal investments, a business already existing in one country establishes the same business operations in a foreign country. A fast-food franchise based in the United States might open restaurant locations in China.

What are two examples of portfolio investment? ›

A portfolio's meaning can be defined as a collection of financial assets and investment tools that are held by an individual, a financial institution or an investment firm. To develop a profitable portfolio, it is essential to become familiar with its fundamentals and the factors that influence it.

Foreign direct investment is often seen as an economic blessing for developing nations. However, new research reveals that it stimulates resource depletion, while fostering dependency on the income generated from that depletion.

Reasons for foreign direct investments

Benefit from reduced operational costs in other nations. Gain from being close to raw materials rather than moving them over the globe. Avoid tariffs and other semi-trade obstacles. Reduce transportation expenses.

The present policy prohibits Foreign Direct Investments (FDI) in the following sectors: Gambling and Betting; Lottery business (including government/ private lottery, online lotteries etc); Activities /sectors which are not open to private sector investment (eg, atomic energy /railways);

Foreign Direct Investment and Foreign Portfolio Investment

FDI implies investment by foreign investors directly in the productive assets of another nation. FPI means investing in financial assets, such as stocks and bonds of entities located in another country.

Definition: Foreign institutional investors (FIIs) are those institutional investors which invest in the assets belonging to a different country other than that where these organizations are based. Description: Foreign institutional investors play a very important role in any economy.

The section further defines the expression "Foreign Institutional Investor" - means such investor as the Central Government may, by notification in the Offical Gazette, specify in this behalf.

The portfolio investment by foreign institutional investors is called foreign institutional investment.

Government and government related foreign investors such as Central Banks, Sovereign Wealth Funds. Also includes banks, Asset Management Companies, investment managers / advisors, portfolio managers, broker dealers and swap dealers, University funds, and Pension funds.

How does a FII work? ›

FIIs generally hold equity positions in foreign financial markets. Due to this, the companies invested in by FIIs generally have improved capital structures due to healthy inflow of funds. Thus, FIIs facilitate financial innovation and growth in capital markets.