Overview of foreign portfolio vs. foreign direct investment
Simply put, foreign investment means making investments in nations other than your own. It entails the transfer of capital from one nation to another and the participation or ownership of foreign nationals in the company. Institutions, corporations, and private individuals can all invest abroad, which is often thought of as a stimulant for economic growth.
Foreign direct investment or foreign portfolio investment are the two most common routes taken by investors interested in international investing. When investors from another country buy securities and other financial assets, this is referred to as a foreign portfolio investment (FPI). Stocks, bonds, mutual funds, exchange traded funds, American depositary receipts (ADRs), and global depositary receipts are a few examples of overseas portfolio investments (GDRs).
Investments made in a business in another country by a person or a company are known as foreign direct investment (FDI). There are numerous avenues for investors to make foreign direct investments. Creating a foreign subsidiary, buying or merging with an existing foreign company, or beginning a joint venture agreement with a foreign corporation are a few frequent ones.
Portfolio investments abroad (FPI)
Investing in financial assets of a foreign nation, such as stocks or bonds listed on an exchange, is known as foreign portfolio investment (FPI). Because portfolio investments can be easily sold off and are therefore perceived as short-term attempts to make money rather than a long-term investment in the economy, this sort of investment is sometimes viewed less positively than direct investment.
Compared to direct investments, portfolio investments often have a shorter time to maturity. Foreign portfolio investors typically anticipate seeing a return on their assets quite fast, just like with any stock investment.
The liquidity of portfolio assets makes them more simpler to sell than direct investments because securities are widely traded. Because they demand significantly less investment cash and due diligence than direct investments, portfolio investments are more affordable for the typical investor.
Direct foreign investment (FDI)
Establishing a direct business interest in a foreign nation through the purchase or establishment of a manufacturing company, the construction of warehouses, or the acquisition of real estate are examples of foreign direct investment (FDI).
Establishing a more substantial, long-term interest in the economy of a foreign country is typically required for foreign direct investment.
Foreign direct investment is typically made by multinational corporations, big institutions, or venture capital firms due to the much higher level of investment required. Since they are regarded as long-term investments and investments in the prosperity of the country itself, foreign direct investment is typically viewed more favorably.
At the same time, it is far more challenging to liquidate or exit a direct investment due to its nature, such as when building or purchasing a manufacturing facility. Because of this, direct investment is typically made with the same mentality as starting a company in one’s own nation: with the goal of turning the company successful and keeping it open indefinitely. Direct investment, in the investor’s eyes, refers to ownership of the business and direct management of it. In comparison to overseas portfolio investment, it also entails more risk, effort, and commitment.
