What is Foreign Direct Investment (FDI) vs Foreign Portfolio Investment (FPI)?

 

 

Let's start from zero.

 

What is a Foreign Investment?

 

Foreign Investment refers to Investment done by an investor in a foreign country (that is to say, other than the investor's home country).

 

Foreign Investments can be categorized into two:

 

1) Foreign Portfolio Investments (FPI)

2) Foreign Direct Investments (FDI)

 

Foreign Portfolio Investments (FPI)

 

·       Foreign Portfolio Investments (FPI) refers to investments into financial assets or securities in a foreign country.

 

·       The financial assets or securities may include stocks, bonds, units of mutual funds, etc.

 

·       In Foreign Portfolio Investments (FPI), the purpose of the investor is generally to make a quick return in a short span of time.

 

Example:

 

A Hedge Fund from USA registered with SEBI as FPI in India.

 

Foreign Direct Investments (FDI)

 

·       Foreign Direct Investments (FDI) is a cross border investment where an investor from one country undertakes investment into an economic entity residing in a foreign country, with an intention of establishing lasting interest and significant influence over the same.

 

·       The key factor in Foreign Direct Investments (FDI) is the lasting interest and significant influence exercised by the investor in the foreign economic entity.

 

·       Generally, as per international norms, when an investor (enterprise or corporation) in one country holds more than 10% voting power in an economic entity (enterprise or corporation) situated in a foreign country, defines lasting interest and significant influence.

 

·       Foreign Direct Investments (FDI) Investments in a foreign country may include 

 

Ø setting up plant or manufacturing facility in a foreign country, 

 

Ø acquisition of a foreign corporation, 

 

Ø establishing joint venture with a foreign corporation or 

 

Ø simply acquiring significant voting power in a foreign company.

 

Example:

 

Samsung Group, a South Korean multinational conglomerate, establishing the world's largest mobile manufacturing plant in Noida, India is one of the best examples of Foreign Direct Investments (FDI).

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