What is meaning by FDI & FPI / What are the key differences between them
What is meaning by FDI & FPI / What are the key differences between them
Definition of FDI: Foreign Direct Investment (FDI) implies an investment made with an intent of obtaining an ownership stake in an enterprise domiciled in a country by an enterprise situated in some other country. The investment may result in the transfers of funds, resources, technical know-how, strategies, etc. There are several ways, of making FDI i.e. creating a joint venture or through merger and acquisition or by establishing a subsidiary company.
The investor company has a substantial amount of influence and control over the investee company. Moreover, if the investor company obtains 10% or more ownership of equity shares, then voting rights are granted along with the participation in the management.
Definition of FPI: Foreign Portfolio Investment (FPI), refers to the investment made in the financial assets of an enterprise, based in one country by the foreign investors. Such an investment is made with the purpose of getting short term financial gain and not for obtaining significant control over managerial operations of the enterprise.
The investment is made in the securities of the company, i.e. stock, bonds, etc. for which the overseas investors deposit money in the host country’s bank account and purchase securities. Usually, FPI investors go for securities that are highly liquid.
Key Differences Between FDI and FPI: The difference between FDI and FPI can be drawn clearly on the following grounds:
1. The investment made by the international investors to obtain a substantial interest in the enterprise located in a different country is a Foreign Direct Investment or FDI. The investment made in passive holdings like stocks, bonds, etc. of the enterprise of a foreign country by overseas investors is known as a Foreign Portfolio Investment (FPI).
2. FDI investors play an active role in the management of the investee company whereas FPI investors play a passive role, in the foreign company.
3. As the FDI investors gain both ownership and management right through investment, the level of control is relatively high. Conversely, in FPI the degree of control is less as the investors obtain only ownership right.
4. FDI investors have a substantial and long-term interest in the firm which is not in the case of FPI.
5. FDI projects are managed with great efficiency. On the other hand, FPI projects are less efficiently managed.
6. FDI investors invest in financial and non-financial assets like resources, technical know-how along with securities. As opposed to FPI. where investors invest in financial assets only.
7. It is not easy for FDI investors to sell out the stake acquired. Unlike FPI, where the investment is made in financial assets which are liquid, they can be easily sold.
Conclusion: Entry and exit of FDI are very difficult, while this is not so with FPI. An investor can easily make the foreign portfolio investment. FDI and FPI are two methods through which foreign capital can be brought into the economy. Such an investment has both positive and negative aspects, as the inflow of funds improves the position of balance of payment while the outflow of funds in the form of dividends, royalty, import, etc. will result in the reduction of balance of payment.
