What is the Difference Between FPI and FDI?

Every country requires capital for economic growth, and the funds cannot be raised from domestic sources alone.

Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI) are the two essential and well-sought types of foreign capital by countries, especially by the developing world. Most of you surely would have heard the words “FPIs” used in the context of the stock market crash through financial news channels or social media platforms.

While most people know that FPI and FDI pertain to foreign investment, fewer realize they differ.

This blog is to look at the two terms individually to understand them better and then go on to understand the differences which make them unique and distinctive.

Foreign Direct Investment (FDI)

FDI pertains to foreign investment in which the investor obtains a lasting interest in an enterprise in another country.

It involves establishing a direct business interest in a foreign country, such as buying or establishing a manufacturing business, building warehouses, or buying buildings. Also, it involves creating more of a substantial, long-term interest in the economy of a foreign country.

Due to the significantly higher level of investment required, FDIs are usually undertaken by MNCs, large institutions, or venture capital firms. In addition, FDI is considered more favourable since they are considered a long-term investment and an investment in the well-being of the foreign country itself.

This investment may result in transferring funds, resources, technical know-how, strategies, etc.

There are several ways of making FDI:

• Creating a joint venture.
• Through merger and acquisition.
• By establishing a subsidiary company.

Examples

Some of the significant FDI announcements in India are as follows:

• In May 2018, Walmart acquired a 77% stake in India's biggest online retailer, Flipkart is an FDI investment.
• In October 2018, VMware, a leading software innovating enterprise in the US, announced an investment of USD 2 billion in India by 2023.
• In June 2018, an appeal from Idea for 100% FDI was approved by the Department of Telecommunication (DoT), followed by its Indian merger with Vodafone making Vodafone Idea the largest telecom operator in India.
• From April to June 2022, India's Computer Software & Hardware industry received $3,427 million in FDI.
• In May 2022, India attracted FDI investments in the defence manufacturing industry worth Rs. 494 crores (US$ 61.91 million).
• Generali, an Italian financial services company, finalized the purchase of a 25% share in Future Generali India Insurance from Future Enterprises in May 2022 for Rs. 1,252.96 crores (US$ 161.92 million).
• In 2021, India got Rs. 343.64 million (US$ 4.35 million) in R&D investments, 516% greater than the previous calendar year.
• As an anchor investor, Canada's pension fund investment board contributed Rs. 1,200 crores (US$ 160.49 million) in the IPOs of several Indian companies, including One97 Communications (Paytm), Zomato, FSN E-Commerce Ventures (Nykaa), and PB Fintech.