Difference between FDI & Portfolio Investment

Investments can be of two sorts. The first is when a firm or an individual buys another firm with full, or very substantial, control of its operations. This investment is called Foreign Direct Investment (FDI). The other type of investment is called portfolio investment. In such an investment, investors purchase stocks of a number of companies with the objective not to gain management control, but to construct an investment portfolio Purposes The purposes of FDI and portfolio investments are different. FDI allows investors to be actively involved in their investment. Investors not only can take strategic decisions like what their foreign subsidiary will produce, in what quantities and for whom, but also are involved in operational issues like cost control, HR, and regulatory compliance. Investors may be motivated by different reasons including improving operations of their existing businesses, and closely monitoring and safeguarding their investments. Investors, who decide to put their money in portfolios, are pursuing different objectives. They want to spread the risk, without the need to learn about how to run different businesses. Investors Individuals and companies making FDI and portfolio investments are usually very different investors. FDI investors are often big multinational companies, social organization (NGOs), governmental or quasi governmental organizations (e.g., USAID) and venture capitalists. They either get into partnerships with local enterprises, set up affiliates, or make acquisitions of a foreign companies. Portfolio investors are mutual funds, hedge funds, pension funds, and other investors who wish to diversify their investments and not get involved in the day-to-day running of the companies they buy into. Risks The risks associated with FDI and portfolio investment primarily are country risk and currency exchange risk. The country risk includes political and economic instability (revolutions, nationalization, tax hikes), and corruption. The currency exchange risk occurs when the exchange rate of the country that has been invested in moves sharply against the exchange rate of the home country.

Investors who have a big enough share of an enterprise can appoint the management of the enterprise that will. Macroeconomic Impact Portfolio investment is much more volatile than FDI.It is necessary to note that even if investments (both FDI or portfolio investments) are denominated in the home country currency (e. FDI does not suffer from being a minority investment. often causing depreciation of the currency of the country from which they are withdrawn. dollars). On balance. portfolio investors.com/about_6575796_difference-between-fdi-portfolioinvestment. however.ehow. foreign portfolio investments are the first to leave the country. which should give it the so-called control premium. making it easier to take it out of a country (unless the country in question introduces capital controls. Because of this.html#ixzz14mEdFpRs . portfolio investments are more liquid. Read more: Difference Between FDI & Portfolio Investment | eHow. putting downward pressure on the domestic exchange rate. has additional risk. FDI and portfolio investment have similar returns. investors still bear the exchange rate risk to some degree because the cash flows their investments generate will need to be converted into the home currency and if the exchange rate has moved substantially. Portfolio investment. the returns will suffer. which is not good for its reputation). which normally leads to higher valuations. accordingly. sometimes even acting to the detriment of minority. pursue their interests vigorously. though..S. on the other hand.com http://www.e. namely conflict of interests between portfolio investors and control investors. especially for developing countries. In periods of crisis.g. But. The underlying reason is that the market for portfolio investment is much more liquid. U. Returns Returns on FDI and portfolio investment are in line with average returns in the country they are invested into. FDI is a preferred source of capital. i. However.

g. Foreign equity is limited only in production of defence equipment (26%) and 5 specific industries where an Industrial License (IL) is mandatory1. FIPB Approval – the Foreign Investment Promotion Board (FIPB) approves investment proposals: where the proposed shareholding is above the prescribed sector caps. or for investments that are within a sector cap (e. Some foreign investors use the FIPB application route where there may be absence of stated policy or lack of policy clarity. An outline of the broad policies for groups of sectors is provided below: Manufacturing: Most Manufacturing sectors are on the 100% automatic route. Differential treatment is limited to a few entry rules. o Infrastructure . takes one of two routes: Automatic route This requires no prior approval for FDI. FIPB approvals (or rejections) are normally received in 30 days.g. termed collectively as Foreign Direct Investment (FDI) when it relates to control or ownership of a company in India. predominantly in some Services sectors.e. or o where the activity belongs to that small list of sectors where FDI is either not allowed or where it is mandatory that proposals be routed through the FIPB (e. hot houses). spelling out the proportion of equity that the foreign investor can hold in an India-registered company or business– termed "sector caps".FDI-policy India has one of the most transparent and liberal Foreign Direct Investment (FDI) regimes among emerging and developing economies. o 100% equity is also allowed in non-crop agro-allied sectors (agro-processing) and crop agriculture under controlled conditions (e. coal & lignite (74%). where 100% foreign ownership is permitted. with foreign equity limits only on atomic minerals (74%). sectors that require industrial licensing) o The FIPB ensures a single-window approval for the investment and acts as a screening agency (for sensitive/negative list sectors). This route is available to all sectors or activities that do not have a “sector cap” i. Post-facto filing of data relating to the investment made with the Reserve Bank of India (RBI) are for record and data purposes. o Most mining sectors are similarly on the 100% automatic route. less than or equal to 26% share of an Insurance company) and where the Automatic route is allowed. Foreign corporate and individual investment in India.g.

Atomic Energy. resorts. . a foreign company can set up a registered company in India and operate under the same laws. renting and leasing. Nidhi Company. Services 100% FDI under the automatic route is permitted for many service sectors such as real estate construction. Subject to these foreign equity conditions. education. Legal services are currently not open to foreign investment. hotels and tourism (including tour operators and travel agencies. townships1. and urban infrastructure.100% FDI under the automatic route is allowed for most infrastructure sectors . ISP/email/voice mail services. foreign investment is permitted subject to specific caps or entry conditions. Retail trade is currently restricted to 51% FDI permitted in single brand retail stores and 100% FDI permitted in wholesale cash and carry. Select Infrastructure sectors have defined caps for e. medical/health services. 100% FDI permitted in non-banking financial services subject to minimum capitalization norms. Besides the above. IT and IT . Sectors where FDI is prohibited are Retail Trading (except single brand product retailing). films. FDI in media is permitted with varying sector caps. serviced apartments. business services and consultancy. Restricted List of Sectors………………………………………………………………. rules and regulations as any Indiaowned company. Certain service sectors are being opened up in a phased manner to allow domestic companies to prepare for global competition. advertising and wholesale trade and courier services.highways and roads. In both banking and insurance. inland waterways and transport. Telecom Services has a sector cap of 74% and Airlines have a 49% 8 sector cap of foreign that are not airline.g. India extends National Treatment to foreign investors with absolutely no discrimination against foreign-invested companies registered in India or in favour of domestic ones.enabled services. FDI is not allowed in plantations*. Trading in Transferable Development Rights (TDRs) and any activity/sector that is not opened to private sector investment. convention and exhibition centers). Venture Capital Funds/Companies (VCFs/VCCs). ports. Gambling and Betting. Business of Chit Fund. Lottery Business.

the government of the country experiencing increasing levels of FDI will have a greater voice at international summits as their country will have more stakeholders in it Disadvantages ..long run aggregate supply will shift outwards .) biotechnology)" Multinational Companies in India Multinational companies are the organizations or enterprises that manage production or offer services in more than one country. Italy. There are also MNCs like British Petroleum and Vodafone that represent Britain.the majority of the MNC in India.employment will increase . Destination India The multinational companies in India represent a diversified portfolio of companies from different countries. In fact.S.g. Finnish mobile giant Nokia has their second largest base in this country. however one can also find companies from other countries as well.if there is a lot of FDI into one industry e.g. India has a huge market for automobiles and hence a number of automobile giants have stepped in to this country to reap the market. and Ford . but the scenario has changed a lot off late. the number of multinational companies in India has increased noticeably. the automotive industry then a country can become too dependent on it and it may turn into a risk that is why countries like the Czech Republic are "seeking to attract high value-added services such as research and development (e.What are the advantages and disadvantages of foreign direct investments? Advantages .it may give domestic producers an incentive to become more efficient .domestic firms may suffer if they are relatively uncompetitive . Belgium and Finland have come to India or have outsourced their works to this country. Germany. Netherlands. Piaggio. since the financial liberalization in the country in 1991. More enterprises from European Union like Britain.aggregate demand will also shift outwards as investment is a component of aggregate demand .causes a flow of money into the economy which stimulates economic activity . One can easily find the showrooms of the multinational automobile companies like Fiat.inflation may increase slightly . account for about 37% of the turnover of the top 20 firms operating in India. And India has been the home to a number of multinational companies. Though majority of the multinational companies in India are from the U. France. Though the American companies .

However. the policy of the government towards FDI has also played a major role in attracting the multinational companies in India. India has got a huge market. Government. Electronics giants like Samsung and LG Electronics from South Korea have already made a substantial impact on the Indian electronics market. there was lesser number of companies that showed interest in investing in Indian market. Besides. Why are Multinational Companies in India? There are a number of reasons why the multinational companies are coming down to India. which is currently growing at a very enviable rate. Hyundai Motors has also done well in mid-segment car market in India. French Heavy Engineering major Alstom and Pharma major Sanofi Aventis have also started their operations in this country. makes continuous efforts to attract foreign investments by relaxing many of its policies. Following are the reasons why multinational companies consider India as a preferred destination for business: • • • • Huge market potential of the country FDI attractiveness Labor competitiveness Macro-economic stability . It has also got one of the fastest growing economies in the world. For quite a long time. There are also a number of oil companies and infrastructure builders from Middle East. The later one is in fact one of the earliest entrants in the list of multinational companies in India. especially after 1991. the scenario changed during the financial liberalization of the country. India had a restrictive policy in terms of foreign direct investment. a number of multinational companies have shown interest in Indian market. As a result. As a result. nowadays.Motors in India.

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