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FDI is an acronym that stands for Foreign Direct Investment.

It refers to the type of investment carried out at international level where an investor will acquire a stake in an enterprise in a foreign country with long term realization of goals in the enterprise. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants, or equipment. FDI typically involves establishment of some physical entity such as a factory or an enterprise in a foreign country. It may involve a relationship created between a parent company in one country and an affiliate in another country which would together form a multinational company. All kinds of capital contributions are included while calculating FDI, for instance stock acquisitions, reinvestments of business profits by a parent company in its foreign subsidiary or just direct lending by a subsidiary company. It is not easy to withdraw from FDI so it is common to have members with a direct interest in the investment committing to managing the day to day affairs of their foreign interests or at least making major strategic decisions. FDI is calculated to include all kinds of capital contributions, such as the purchases of stocks, as well as the reinvestment of earnings by a wholly owned company incorporated abroad (subsidiary), and the lending of funds to a foreign subsidiary or branch. The reinvestment of earnings and transfer of assets between a parent company and its subsidiary often constitutes a significant part of FDI calculations. FDI is more difficult to pull out or sell off. Consequently, direct investors may be more committed to managing their international investments, and less likely to pull out at the first sign of trouble. On the other hand, FPI (Foreign Portfolio Investment) represents passive holdings of securities such as foreign stocks, bonds, or other financial assets, none of which entails active management or control of the securities' issuer by the investor. The Foreign Exchange Management Act 2000 defines Foreign Portfolio Investment as buying and selling of shares, convertible debentures of Indian companies, and units of domestic mutual funds at any of the Indian stock exchanges It is the passive holding of securities such as foreign stocks, bonds, or other financial assets ,none of which entails active management or control of the securities issues by the investor, Unlike FDI, it is very easy to sell off the securities and pull out the foreign portfolio investment. Hence, FPI can be much more volatile than FDI. For a country on the rise, FPI can bring about rapid development, helping an emerging economy move quickly to take advantage of economic opportunity, creating many new jobs and significant wealth. However, when a country's economic situation takes a downturn, sometimes just by failing to meet the expectations of international investors, the large flow of money into a country can turn into a stampede away from it.

Comparison chart
FDI FPI Comes from more diverse sources e.g.a small company's pension fund or through mutual funds held by individuals; investment via equity instruments (stocks) or debt (bonds) of a foreign enterprise. No active involvement in management. Investment instruments that are more easily traded, less permanent and do not represent a controlling stake in an enterprise. Foreign Protfolio Investment

Comes from:

Tends to be undertaken by Multinational organizations

Involvement direct or indirect: Stands for:

Involved in management and ownership control; long-term interest Foreign Direct Investment

What is invested:

Involves the transfer of nonfinancial assets e.g.technology and Only investment of financial assets. intellectual capital, in addition to financial assets.

In 1992, India opened up its economy and allowed foreign portfolio investment in its domestic stock market .Since then ,FPI has emerged as a major source of private capital inflow in this country.India is more dependent upon FPI than FDI as a source of foreign investment.During 1992 -2005 more than 50 percent of foreign investment in India came from FPI. ADVANTAGES FPI FOR INDIA FPI helps in mitigating foreign exchange shortages Stock market depth(ratio of stock market capitalization to GDP) Development of secondary market takes place, Beneficial if well functioning stock markets support the economic development of the country. Rapid growth of private placements markets

ADVANTAGES FDI Long term growth for the country Create more direct jobs New technology & best practices can be brought to the country.

Summary: 1. Unlike FPI, FDI requires more investment specific capital and so its harder to adjust this type of investment in short term changing conditions whereas FPI can easily be adjusted as the business conditions fluctuate. 2. FDI tends to yield more returns on investment as a direct result of investors controlling position in the investment but with FPI, although theres a lot of flexibility to adjust to short term environmental changes, theres generally less returns realized, making this a favorite investment route for smaller firms looking for flexibility and lower investment specific costs other than bigger returns. 3. FDI and FPI investment calculations are determined by the amount of investments made in a single year, which is the flow, or as stock, which is the amount of investment massed in a year. It is therefore harder to make estimates for FPI portfolio flows especially if a FPI investment is made for one year or less as they contain various instruments, so a definite value is hard to estimate. 4. However on a whole, the difference between FDI and FPI may be hard to establish, especially if it is a relatively big foreign investor considering investing in stock options. The two models coincide in part with each other in this case and it may go down to choosing between flexibility and returns on investment.