Foreign Direct Investment and Foreign Portfolio Investment
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Published: Wed, 13 Sep 2017
Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are the two most important terms of the market. The major difference between the two could be explained as one takes the form of investment and other financing. They are usually adopted by most developing countries. The measurement criteria for both the terms lie in the capital contribution made in the particular company or market. The most advantageous thing is the ignorance of debt creation. This is why these terms are preferred than External Commercial Borrowings which creates a debt trap for most of the countries.
Foreign Direct Investment (FDI) could be defined as an investment by non-residents mostly the business entities to establish business operations in a country with the proper management of equipments, machineries, marketing, personnel etc. In the established company the non-resident entity takes over a considerable stake to get the ownership rights and enjoys the management control over the company. A Good example is the investment of US based IBM in India by opening various subsidiaries. The Foreign Portfolio Investment (FPI) on the other hand, is the investment by a non-resident in the capital market of a country. The investment can be in the form of shares or debentures i.e. debt instruments. Thus, FPI involves cross border transactions in the equity or debt market of a country by a foreign resident. The example could be when someone from US buys a share of Infosys that’s Portfolio Investment (Jose 2016).
The differences are evaluated according to the various arguments provided. The main aim of Foreign Portfolio Investment is to get maximum profits in the form of dividends or interest from securities. However, the returns from Foreign Direct Investment take the form of ownership in a company and thus are totally involved in the profit generation activities of the company. Thus the returns are much higher and certain as compared to the FPI returns (Shubhra 2016). Normally a portfolio investor prefers to keep his investment in an asset for a particular period of time however investment which is in the form of a business is for a much longer duration. Therefore FDI are for longer duration and FPI is for shorter duration (Cavusgil 2014). With FPI it is very easy to sell off the portfolio investment and pull out the securities. Hence, the volatility of FPI is much more as compared to FDI because the direct investors are highly committed to manage their cross border activities and are not likely to sell off the entire investment easily (Differen.com 2017).
Above mentioned discussion and arguments put light on the fact that both the terms FDI and FPI are beneficial and the simultaneous existence of both enhances the economic performance of a country.
Free market is a system of economy which creates interactions between buyers and sellers. These buyers and sellers normally have very few regulations. The interaction between buyers and sellers is such that the sellers can immediately respond to the preferences of buyers by increasing or decreasing their prices so that they can meet the demand. Therefore, if the demand goes up the sellers will increase the price so that only capable buyers can buy the products and the supply demand ultimately meets and vice versa. The biggest advantage of free market is the ease of interaction. Further, the government intervention is least and the buyers get the freedom to spend their money the way they want. The increasing adaption of free market has opened the gates of more liberalized policies and prices leading to increase in the number and types of cross border transactions and investments. Thus, the world is moving towards a more transparent economy whereby the prices of different countries will be based totally on the demand for the products and the demand be driven by the consumer preferences (Cavusgil 2014).
Major examples of adaption of free market economy are Toyota, Ford, Dodge and Chevy competitive forces, the European commission’s announcement for Digital Single Market Strategy and the competition driven Tech market etc.A perfect example of free market is the bombardment of commercials from Toyota, Ford, Dodge and Chevy showing the features and preferences for their products to that of their competitors. The first one to bring out the commercial was Toyota which forced the American automakers to inculcate new features in their products and bring innovation in the market. All the companies were highly involved with the market study and moved towards outperforming their competitors. Each of the above mentioned changes were made without any intervention by the government showing the real workings of a free market(wordpress.com 2017). The European Commission had released the DSMS under the presidency of Jean-Claude Juncker. The president noted that the development of single market strategy is aimed to overcome the hurdles of cross border barriers in telecom, e-commerce, consumer law etc. The single market strategy provides for free movement of not only goods and services but also the persons and the businesses can smoothly access online activities under a highly protected infrastructure. The major pillars of DSMS lie with Geoblocking, Copyright and E-commerce (Brotman 2016). Another Example is Technology. Technology is the most rapid changer ever. There were no ipads before and now there are many games which are third or fourth titles in the series and are being used effectively. The innovation which can be seen in technology sectors provides one of the best examples of the working of a free economy. The entire tech sector has been seen evolving over the last few years and the evolution is highly improving the hardware, software and the knowledge base together which brings a competitive collaboration.
The above examples hence prove that the increasing competition is forcing the markets to move towards a competitive economy. This strategy is being adopted domestically as well as internationally so that the hurdles between two countries can be minimized and the world can be seen more unitized with a vision to make developing countries better economies and to maintain the efficacy of the developed ones. Thus, free market forces ultimately lead to globalization of economies.
Brotman, SN 2016, Centre for Technology Innovation at Brooking, viewed 20/03/2017, <https://www.brookings.edu/wp-content/uploads/2016/07/digital-single-market.pdf>.
Cavusgil, ST, Knight, G., Riesenberger, J.R., Rammal, H.G. and Rose 2014, International business, Pearson Australia.
Differen.com 2017, FDI vs. FPI, viewed 20/03/2017, <http://www.diffen.com/difference/FDI_vs_FPI>.
Jose, T 2016, Foreign Direct Investment (FDI) vs Foreign Portfolio Investment (FPI) viewed 20/03/2017, <http://www.indianeconomy.net/splclassroom/286/foreign-direct-investment-fdi-vs-foreign-portfolio-investment-fpi>.
Shubhra 2016, Foriegn Investments-FDI Vs FPI Vs FII, viewed 20/03/2017, <http://www.affairscloud.com/foreign-investments-fdi-vs-fpi-vs-fii/>.
wordpress.com 2017, A look Inside, viewed 21/03/2017, <https://myownmanifesto.wordpress.com/2009/01/11/a-great-example-of-the-free-market/>.
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