Every country requires capital for economic growth, and the funds cannot be raised from domestic sources alone.
Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI) are the two essential and well-sought types of foreign capital by countries, especially by the developing world. Most of you surely would have heard the words “FPIs” used in the context of the stock market crash through financial news channels or social media platforms.
While most people know that FPI and FDI pertain to foreign investment, fewer realize they differ.
This blog is to look at the two terms individually to understand them better and then go on to understand the differences which make them unique and distinctive.
Foreign Direct Investment (FDI)
FDI pertains to foreign investment in which the investor obtains a lasting interest in an enterprise in another country.
It involves establishing a direct business interest in a foreign country, such as buying or establishing a manufacturing business, building warehouses, or buying buildings. Also, it involves creating more of a substantial, long-term interest in the economy of a foreign country.
Due to the significantly higher level of investment required, FDIs are usually undertaken by MNCs, large institutions, or venture capital firms. In addition, FDI is considered more favourable since they are considered a long-term investment and an investment in the well-being of the foreign country itself.
This investment may result in transferring funds, resources, technical know-how, strategies, etc.
There are several ways of making FDI:
- Creating a joint venture.
- Through merger and acquisition.
- By establishing a subsidiary company.
Examples
Some of the significant FDI announcements in India are as follows:
- In May 2018, Walmart acquired a 77% stake in India's biggest online retailer, Flipkart is an FDI investment.
- In October 2018, VMware, a leading software innovating enterprise in the US, announced an investment of USD 2 billion in India by 2023.
- In June 2018, an appeal from Idea for 100% FDI was approved by the Department of Telecommunication (DoT), followed by its Indian merger with Vodafone making Vodafone Idea the largest telecom operator in India.
- From April to June 2022, India's Computer Software & Hardware industry received $3,427 million in FDI.
- In May 2022, India attracted FDI investments in the defence manufacturing industry worth Rs. 494 crores (US$ 61.91 million).
- Generali, an Italian financial services company, finalized the purchase of a 25% share in Future Generali India Insurance from Future Enterprises in May 2022 for Rs. 1,252.96 crores (US$ 161.92 million).
- In 2021, India got Rs. 343.64 million (US$ 4.35 million) in R&D investments, 516% greater than the previous calendar year.
- As an anchor investor, Canada's pension fund investment board contributed Rs. 1,200 crores (US$ 160.49 million) in the IPOs of several Indian companies, including One97 Communications (Paytm), Zomato, FSN E-Commerce Ventures (Nykaa), and PB Fintech.
Latest FDI Trends In India
The Modi Government’s favourable investment policy regime and robust business environment have ensured foreign capital flows into the country.
The Government of India (GOI) has taken many initiatives in recent years, such as relaxing FDI norms across sectors such as the defence sector and PSU, especially in the oil refineries sector, telecom sector, power exchanges, and stock exchanges, among others.
According to UNCTAD's World Investment Report 2022, India will be the seventh largest beneficiary of FDI among the top 20 host countries in 2023. In FY22, India attracted the highest-ever FDI inflows of US$ 84.8 billion, including FDI equity inflows of US$ 7.1 billion in the services sector.
Foreign Portfolio Investment (FPI)
Foreign Portfolio Investment (FPI full form), on the other hand, refers to investing in the financial assets of a foreign country, such as stocks or bonds available on an exchange.
FPI involves the purchase of securities that can be easily bought or sold.
FPI generally intends to invest money into the foreign country’s stock market to generate a quick return.
Hence, this type of investment is viewed less favourably than direct investment because portfolio investments can be sold off quickly and are sometimes seen as short-term attempts to make money rather than long-term economic investments.
In India, FPIs include investment groups of Foreign Institutional Investors (FIIs), Qualified Foreign Investors (QFIs), subaccounts, etc. NRIs don’t come under FPI.
Latest FPI Trends in India
With a few exceptions, foreign portfolio investors (FPIs) have been selling equities in Indian markets for over a year, beginning in October 2021. Tighter monetary policy in advanced nations, increased demand for dollar-denominated commodities, and the strength of the US dollar has resulted in a persistent outflow of funds from Indian markets. In times of significant market uncertainty, investors often prefer stable markets.
According to data from the NSDL website, foreign portfolio investors sold Rs 121,439 crore of equities in India in 2022. Meanwhile, their demand for debt instruments has improved slightly. The most recent NSDL statistics show that FPIs bought debt assets worth Rs 9,033 crore.
Now, let us understand FDI and FPI difference in detail here-
Difference Between FDI and FPI
While FDI vs FPI involves putting money into a foreign country, the two investment options differ considerably.
Following are some critical differences between FPI and FDI-
Parameters | FDI | FPI |
Definition | 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. |
Role of investors | Active Investor | Passive Investor |
Type | Direct Investment | Indirect Investment |
Degree of control | High Control | Very low control |
Term | Long term investment | Short term investment |
Management of Projects | Efficient | Comparatively less efficient |
Investment has done on | Physical assets of the foreign country | Financial assets of the foreign country |
Entry and exit | Difficult | Relatively easy |
Leads to | Transfer of funds, technology, and other resources to the foreign country | Capital inflows to the foreign country |
Risks Involved | Stable | Volatile |
The Bottom Line
An investor from a foreign country can easily make a foreign portfolio investment.
FDI and FPI are two ways foreign capital can be brought into the domestic economy.
Such an investment has both positive and negative aspects, as the inflow of funds improves the position of the balance of payment. In contrast, the outflow of funds in the form of dividends, royalties, imports, etc., will reduce the balance of payment.
