FP Vs. FDI: - Overview

To expand its economy, a country requires finances. One method is to approach domestic sources, while another is to pursue overseas sources. A country can obtain funds from outside sources in two ways. Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are the two types of FDI and FPI, respectively (FPI). Despite their similarity in sound, they are diametrically opposed. This article delves into the differences between foreign direct investment (FDI) and foreign portfolio investment (FPI), as well as FDI vs FPI.

--------------Blog Contact Form-------------

Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) occurs when a corporation invests a significant amount of money in a foreign company, gaining control of the company and participating in its day-to-day operations. In FDI, the corporation brings in knowledge, skill, and technological know-how in addition to capital. As a result, they have considerable decision-making authority.

• FDIs are frequently made in countries with significant growth potential as well as countries with a qualified workforce.
• Even when a corporation purchases assets or begins a business in a foreign jurisdiction, FDI might occur. Expansion of business into new countries is also a typical trend. Furthermore, a company might merge or form a joint venture with a foreign firm.
• An FDI can result in horizontal or vertical expansion, as well as the formation of a conglomerate. Horizontal investment refers to when a company invests in or starts a business that is similar to its own. When a corporation engages in vertical investment, it invests in businesses that are complementary to its own. A conglomerate investment, on the other hand, involves a corporation investing in a business that is completely unrelated to its core industry.
• The Indian economy opened up to the rest of the world in 1991, and it has been attracting international investment ever since.

Read Our More: FDI in India: Foreign Direct Investment Approval and Policy of India

FDI can be generated in a variety of methods, including:

• Establishing a cooperative venture
• Way of mergers and acquisitions
• By forming a subsidiary corporation

Illustration

The following are some of India's recent notable FDI announcements:

• Walmart purchased a 77 per cent share in Flipkart, India's largest online retailer, in May 2018, as an FDI investment.
• In October 2018, VMware, a renowned software innovation company in the United States, announced a USD 2 billion investment in India by 2023.
• The Department of Telecommunication (DoT) granted Idea's request for 100 per cent FDI in June 2018, followed by its Indian merger with Vodafone, establishing Vodafone Idea India's largest telecom operator.
• The International Finance Corporation (IFC), the investment arm of the World Bank Group, plans to invest roughly USD 6 billion in many sustainable and renewable energy programmes in India by 2022.

India's Latest FPI Trends

Foreign capital continues to come into the country thanks to the Modi government's favourable investment policy framework and robust business environment.

In recent years, the Government of India (GOI) has adopted a number of efforts, including loosening FDI requirements in sectors such as defence, PSUs, particularly in the oil refineries industry, telecom, power exchanges, and stock exchanges, among others.

India had the highest-ever FDI inflow of USD 64.37 billion during the FY 2018-19, according to the Department for Promotion of Industry and Internal Trade (DPIIT), demonstrating that the government's efforts to improve ease of doing business and simplify FDI regulations are paying off.

India received the most FDI equity inflows from Singapore (USD 16.23 billion) in FY 2018-19, followed by Mauritius (USD 8.08 billion), the Netherlands (USD 3.87 billion), the United States (USD 3.14 billion), and Japan (USD 3.14 billion) (USD 2.97 billion).

The Government of India is working on a road map to accomplishing its goal of USD 100 billion in FDI inflows as of February 2019.

Foreign Portfolio Investment (FPI)

Foreign Portfolio Investment (FPI) refers to passive investments in a foreign economy's financial assets. Stocks, bonds, and other financial assets are examples of financial assets. Furthermore, none of these require active management on the part of the investor.

• FPI's main goal is to invest money in international markets in the hopes of making a quick profit. As a result, it entails the acquisition of easily acquired and sold securities.
• FPIs are created to achieve short-term financial gains, not to seize control of a company's managerial activities.
• FPIs are sometimes regarded as less favourable than direct investments due to the ease with which the portfolio investments can be liquidated. FPIs are sometimes created with the goal of making quick money rather than making a long-term investment in a foreign country (economy).
• In October 2018 and July 2020, India saw the most FPI withdrawals. This could indicate that foreign investors are looking for bigger returns in other developing countries.

Read Our Blog: Foreign Portfolio Investment: Types, Examples of Foreign Portfolio Investment

India's Latest FPI Trends

FPIs turned net sellers in July, according to statistics from the National Securities Depository Ltd (NSDL), removing roughly Rs. 12,400 crores from the Indian stock market.

This is the largest outflow from the Indian stock market since October 2018, when foreign investors wiped out Rs. 27,622 crore.

In addition, India's FPI outflow in July was the biggest among emerging countries, indicating that investors are moving their attention to other developing economies in search of stronger returns.

The FPI migration was sparked by the Centre's proposal in the Union Budget for FY 2019-20 to levy a higher tax surcharge on the super-rich.

The problem was exacerbated by a weak monsoon and a sluggish economy.

FPI and FDI: Key Differences

Although both FDI and FPI entail foreign investment, there are some significant variations between the two.

• The first distinction stems from the foreign investor's level of control. FDI investors generally assume ownership of domestic companies or joint ventures and participate actively in their management. FPI investors, on the other hand, are mostly passive investors who aren't involved in the day-to-day operations or strategic goals of domestic companies, even if they own a controlling stake in them.
• The second distinction is that FDI investors are compelled to take a long-term strategy to their investments because the planning stage to project realisation can take years. FPI investors, on the other hand, may claim to be in it for the long haul, but they often have a much shorter investment horizon, especially when the local economy is experiencing volatility.
• This leads us to our last point. FDI investors may find it difficult to liquidate their holdings and leave a country because their assets are often vast and illiquid. Because financial assets are extremely liquid and extensively traded, FPI investors can virtually quit a country with a few mouse clicks.

The Benefits and Drawbacks of FDI and FPI

For most economies, FDI and FPI are both important sources of funding. Foreign capital can be utilised to build infrastructure, establish industrial and service centres, and invest in other productive assets like machinery and equipment, all of which contribute to economic growth and job creation.

Most countries, however, clearly prefer FDI to FPI for attracting foreign investment since it is far more stable and demonstrates long-term commitment. However, for a newly open economy, significant FDI may only come after foreign investors are confident in the country's long-term prospects and the capabilities of the local government.

Despite the fact that FPI is a desirable source of investment money, it has a significantly higher level of volatility than FPI. FPI is commonly referred to as "hot money" because of its proclivity to escape when an economy shows indications of distress. During times of uncertainty, these enormous portfolio moves might worsen economic concerns.

Final Thoughts

While both FDI and FPI can provide an economy with much-needed money, FPI is far more variable, and this volatility can exacerbate economic issues in uncertain times. Retail investors should familiarise themselves with the distinctions between these two important sources of foreign investment because this volatility can have a considerable negative influence on their investment portfolios.