What is the Difference Between FPI and FDI?

Foreign Portfolio Investments (FPI)

Foreign portfolio investors invest in bonds, stocks, and other financial assets outside the investor’s country. FPI does not give investors ownership of the company's assets. Investors involved in FPI receive short-term returns and hold no significant influence or control over the companies they invest in. FPI is a popular method of investing in a foreign economy. It is also a significant financial source for many economies. FPI is liquid, depends on market volatility, and includes various securities, such as equities, government, and corporate bonds. Given below are the features of FPI:

Encourages the growth of equity markets:
The market will reward greater performance, prospects, and corporate governance as there is more competition between financiers.
Global credit:
Foreign countries provide investors with more credit availability and allow them to use more leverage to boost the return on their equity investment.
Liquidity:
Through FPI, investors can easily purchase or sell financial assets in a secondary market. FPI offers a high level of liquidity to its investors.

Foreign Direct Investment (FDI):

Foreign Direct Investment (FDI) means an organisation transfers funds from one nation to another. It includes ownership in a foreign project or business by an investor, business, or government from another nation. When a company expands operations to a new area, FDI usually refers to purchasing a foreign business entirely or acquiring a sizable part of it. FDI takes various forms, such as mergers and acquisitions, where an existing company is purchased or merged with a local one. FDI trends are important in the financial world because they promote strong, enduring economic connections. They also lead to the international transfer of complementary aspects of business models, like technology, management, skills, and production processes. Given below are the features of FDI:

Development of Human Resources:
FDI facilitates the development of the human resources of the foreign country, such as the workforce's knowledge and skill set. The country's human capital quotient and education are raised by acquiring and improving skills through education and experience. Siemens declared in 2023 that it would invest €1 billion in India to increase production of electrical switchgear and transformers in Pune, Maharashtra. Over 1,000 workers will receive training in advanced manufacturing and industry. The initiative aims to increase employment, boost manufacturing sector employability, and help India develop a competent workforce.
Equity Ownership:
FDI usually involves acquiring equity ownership in a foreign investment. This can take the form of establishing new business operations or acquiring an existing company.
Availability of Funds and Technologies:
The company becomes more efficient and influential in the foreign country not only because of the gradual diffusion of newer, improved technology and processes into the local economy but also because of the integration of newer, improved technologies and processes into its operations. Simultaneously, labour-intensive methods in foreign countries might help reduce production costs and increase the availability of funds.
Transfer of Resources and Technology:
FDI often involves the transfer of resources, technology, and expertise from the investing country to the host country. This transfer can contribute to the development of the host country’s economy.
Better Flow of Capital:
A country's ability to raise capital in the international capital markets has limitations but is especially beneficial for those with limited local resources.
Risk and Reward:
FDI comes with risks, including exposure to the economic and political conditions of the host country. However, it also offers the potential for higher returns over the long term.

FDI vs. FPI

Following are some significant differences between FPI and FDI:

Category	Foreign Direct Investment	Foreign Portfolio Investment
Purpose	Transfer of funds, supplies, and technologies to other countries.	Money inflows into foreign countries.
Kind of Investment	Possession and direct control of businesses internationally.	Investment through purchasing stocks, bonds, and other financial assets off the international market.
Motive	Strategic goals or the pursuit of long-term expansion and market access.	Influenced mainly through financial benefits and immediate profits.
Manage and influence	Allows significant impact, control, and influence over the company's management and operations.	Lack of control and authority over the business's activities.
Factors of risk	Susceptible to the political, economic, and regulatory risks accompanying the host nation.	The prices of assets are subject to variances and market volatility.
Type of Investors	Active	Passive
Participation	Assists with long-term goals by allowing participation in ownership and managerial authority.	Offers short-term gains. Investors don't actively participate in managerial tasks.
Type of Assets	Investment in the real stock and resources of other businesses. FDI consists of both financial and non-financial assets.	Investment in bonds, foreign investment, equities, and exchange-traded funds (ETFs).
Project Managing	The management of projects is efficient.	The management of projects is less efficient.
Entry and Exit	Difficult.	Relatively easy.
Participation in business operations	The investor(s) actively participate in the business's activities. Additionally, they might be able to influence decisions.	Passive investing. No participation in the business's activities by the investor(s).

Conclusion

FDI and FPI are common ways to hold investments in a foreign country. FDI allows investors to hold controlling interests, while FPI allows investors to own financial assets. FDI is available only to high-net-worth investors or institutional investors, while any retail investor can invest (FPI) in shares, bonds, or other financial securities in another country.