FDI VS FPI – WHICH ONE IS BETTER?

May 30, 2024

FDI VS FPI – WHICH ONE IS BETTER?

OVERVIEW TABLE

Aspect	Foreign Direct Investment (FDI)	Foreign Portfolio Investment (FPI)
Definition	Investment to establish a long-term commercial presence	Investment in financial assets like stocks and bonds
Investment Nature	Direct investment with control and management power	Indirect investment without control
Investment Horizon	Long-term	Short-term
Forms	Joint ventures, mergers and acquisitions, subsidiary companies	Debt investments, equity investments, ETFs, mutual funds, REITs
Economic Impact	Contributes to employment, technological development, and economic growth	Impacts financial markets and liquidity
Risk and Volatility	Higher risk due to long-term commitment and business involvement	Subject to market volatility, easier entry and exit
Control and Ownership	Provides control over business operations	No control over business operations
Governmental Support	Supported by initiatives like "Made in India", eased regulations in key sectors	Significant fluctuations, influenced by market conditions
Examples	Establishing a manufacturing plant or subsidiary in a foreign country	Buying shares in a foreign companys stock market
Recent Trends	India's FDI reached $84.84 billion in 2021	FPI inflows hit a record $36.5 billion in 2021

KEY DIFFERENCES

Investment Nature: FDI involves direct control and management, while FPI focuses on financial asset investments without control.

Investment Horizon: FDI is suited for long-term investments, while FPI allows for short-term gains and quick market exits.

Economic Impact: FDI contributes directly to economic growth and employment, whereas FPI primarily affects financial markets.

Risk and Volatility: FDI carries higher risks due to long-term commitments, while FPI offers more liquidity but is influenced by market volatility.

GOVERNMENTAL SUPPORT

To attract FDI, the Government of India has launched initiatives like the "Made in India" campaign and eased regulations in sectors like defense and oil refineries. Meanwhile, FPI in India has experienced significant fluctuations, with record inflows of $36.5 billion in 2021. The United Nations Conference on Trade and Development (UNCTAD) placed India seventh among the top 20 host economies for FDI in 2021, citing factors like India's expanding GDP, skilled workforce, strategic position, and favorable investment climate.

CONCLUSION

Choosing between FDI and FPI depends on an investor’s needs and goals. Key factors include control and ownership, investment horizon, risk tolerance, and the desired economic impact.

SRIRAM's