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SIMPLIFIER: FDI VS FPI – WHICH ONE IS BETTER



  May 30, 2024

SIMPLIFIER: FDI VS FPI – WHICH ONE IS BETTER



WHAT IS FDI?

Foreign Direct Investment (FDI) involves a foreign entity investing in another country with the intention of establishing a long-term commercial presence. This usually involves purchasing at least 10% of a foreign company’s shares to obtain a controlling position and management power. There are three main ways to make an FDI:

• Creating a joint venture
• Through mergers and acquisitions
• Establishing a subsidiary company

WHAT IS FPI?

Foreign Portfolio Investment (FPI) involves foreign investors making international investments in stocks, bonds, and other financial assets without seeking control over the company. FPI is a short-term trading method influenced by market trends and includes various forms such as:

• Debt investments
• Equity investments
• Exchange-traded funds (ETFs)
• Mutual funds
• Real estate investment trusts (REITs)

HOW IS FDI DIFFERENT FROM FPI?

• Investment Nature: FDI is a direct investment in foreign businesses, providing control and management power, whereas FPI is an indirect investment in financial assets like stocks and bonds.

• Investment Horizon: FDI is typically a long-term investment, allowing businesses to establish or expand operations in a foreign country. In contrast, FPI is a short-term investment, enabling quick entry and exit to capitalize on market opportunities.

• Economic Impact: FDI can significantly contribute to the foreign economy through employment, technological development, and economic growth. FPI primarily impacts financial markets and liquidity with limited direct economic impact.

• Risk and Volatility: FDI involves higher risks due to its long-term commitment and involvement in business operations. FPI is subject to market volatility but allows easier entry and exit, making it less risky.

WHICH ONE IS BETTER: FDI OR FPI?

Choosing between FDI and FPI depends on an individual’s needs and investment goals. Factors to consider include:

• Control and Ownership: FDI provides greater control and ownership over foreign business operations.

• Investment Horizon: FDI suits long-term investments, while FPI suits those looking for short-term gains.

• Risk and Volatility: FDI involves higher risk but potential for substantial economic impact, whereas FPI offers more liquidity and less risk.

• Sector and Focus: The choice may depend on the sector and the investor’s focus on either direct economic involvement (FDI) or financial market returns (FPI).

GOVERNMENTAL INTERFERENCE

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. FPI in India has seen 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. India saw FDI growth from $60.22 billion in 2020 to a record $84.84 billion in 2021, driven by factors such as its expanding GDP, skilled workforce, strategic position, and favorable investment climate.



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