Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are the two most important terms of the market. The major difference between the two could be explained as one takes the form of investment and other financing. They are usually adopted by most developing countries. The measurement criteria for both the terms lie in the capital contribution made in the particular company or market. The most advantageous thing is the ignorance of debt creation. This is why these terms are preferred than External Commercial Borrowings which creates a debt trap for most of the countries.
Foreign Direct Investment (FDI) could be defined as an investment by non-residents mostly the business entities to establish business operations in a country with the proper management of equipment’s, machineries, marketing, personnel etc. In the established company the non-resident entity takes over a considerable stake to get the ownership rights and enjoys the management control over the company. A Good example is the investment of US based IBM in India by opening various subsidiaries. The Foreign Portfolio Investment (FPI) on the other hand, is the investment by a non-resident in the capital market of a country. The investment can be in the form of shares or debentures i.e. debt instruments. Thus, FPI involves cross border transactions in the equity or debt market of a country by a foreign resident. The example could be when someone from US buys a share of Infosys that’s Portfolio Investment.
The differences are evaluated according to the various arguments provided. The main aim of Foreign Portfolio Investment is to get maximum profits in the form of dividends or interest from securities. However, the returns from Foreign Direct Investment take the form of ownership in a company and thus are totally involved in the profit generation activities of the company. Thus the returns are much higher and certain as compared to the FPI returns. Normally a portfolio investor prefers to keep his investment in an asset for a particular period of time however investment which is in the form of a business is for a much longer duration. Therefore FDI are for longer duration and FPI is for shorter duration. With FPI it is very easy to sell off the portfolio investment and pull out the securities. Hence, the volatility of FPI is much more as compared to FDI because the direct investors are highly committed to manage their cross border activities and are not likely to sell off the entire investment easily.
Above mentioned discussion and arguments put light on the fact that both the terms FDI and FPI are beneficial and the simultaneous existence of both enhances the economic performance of a country.