FDI VS FPI

By Saptarshi Chowdhury (27.3.2018)

Foreign Direct Investment (FDI) tends to involve establishing more of a substantial, long-term
interest in the economy of a foreign country. Due to the significantly higher level of investment
required, FDI is usually undertaken by MNCs.
At the same time, the nature of FDI, such as creating or acquiring a manufacturing facility,
makes it much more difficult to liquidate or pull out of the investment. For this reason, FDI is
usually undertaken with essentially the same attitude as establishing a business in one's own
country with the intention of making the business profitable and continuing its
operation indefinitely.
FPI typically has a shorter period for investment return than FDI. As with any equity investment,
FPI investors usually expect to quickly realize a profit on their investments. However, unlike
FDI, FPI does not offer control over the business entity in which the investment is made.
As securities are easily traded, the liquidity of FPIs makes them much easier to sell than FDIs.
FPIs are more accessible for the average investor than FDIs because they require much less
investment capital.
These two are different by the following notion:
1. FDI refers to the investment made by the foreign investors to obtain a substantial interest
in the enterprise located in a different country, on the other hand when an international
investor, invests in the passive holdings of an enterprise of another country, i.e.
investment in the financial asset, it is known as FPI.
2. For FDI the role of the investor in the economic activity is active and that of FPI the role
of the investor is passive. He cannot be able to make the decisions about his invested
capital.
3. The degree of control over investment is relatively higher than that of FPI.
4. FDI is usually a structural investment which is made in long term where as FPI is made
with short-term contract.
5. The management of the project is comparatively efficient in FDI than that of FPI.
6. FDI investment takes place in physical asset and FPI takes place in financial asset.
7. Entry and exit is rigid in FDI and FPI is relatively flexible.
8. FDI results in transfer of fund, technology and other resources where as FPI results in
capital inflow and direct BOP adjustment.