Difference between FDI and Portfolio Investment

FDI or Foreign Direct Investment refers to a broad level investment, where people obtain a full or substantial stake in a company or enterprise, with the aim of achieving long term goals.  FPI or foreign portfolio investment on the other hand, is the purchasing of foreign stocks and bonds, with a view of making profitable returns.

For this purpose, the aims and objectives of people will differ with regards to the type of investment opportunity they tend to choose. FDI will give the investor a direct stake in the business, where he/she will be entitled to make important strategic and management decision. This can further occur in scenarios where a company is working on an affiliate basis and will adhere to the quality and control as defined by its foreign subsidiary. In FPI, investors do not command a direct say in the business, but will be looking to invest in a diversified portfolio in order to generate a lucrative return.

As the investing party is dealing with more liquid assets, he or she can easily abandon the portfolio – mutual funds, hedge or pension funds – depending on the market conditions prevalent in the foreign country.  However, FDI comes with a physical presence and the liquidation process may be hard to realize due to the various complications involved. These usually include various multinational companies, NGOs and government organizations.

For this reason, it is fair to say that FPI is usually aimed at gaining short term benefits, and withdrawing investment during troublesome times. FDI, on the other hand, requires greater initial capital and will make it harder for the investor to pull out his or her investment.

Returns on both investments can vary but when accounting for the country risk (political tension) and exchange rate risks (depreciation or appreciation of a currency as compared to the other), both stand at par in terms of the overall returns. However, FPI is much more volatile than FDI, where an investor can quickly lose most of the investment.