DMPQ: What is the difference between FDI and FII. ( Economy)

 

Foreign Direct Investment Foreign Portfolio Investment
FDI is an investment made by a company or individual in the business of another country in the form of either establishing a new business or acquiring the existing business. FPI is an investment made by a company or an individual in the stock markets or debt markets of another country. FPI investors merely purchase equities/shares/bonds/debentures of foreign based countries.
FDIs are mainly made in Open Economies as opposed to tightly controlled closed economies. FPIs are mainly made with the objective of making quick profits by buying and selling shares, bonds and debentures.
FDIs are made for a longer period as the foreign investor’s controls and owns the companies in which they have invested. FPIs are made for shorter periods as the foreign investor do not own the companies and only invest in shares of the existing companies.
FDIs are much Stable. FPIs are highly volatile.
As per Organisation of Economic Cooperation and Development (OECD), the threshold for an investment to be considered as FDI is 10 percent or more ownership stake. As per Organisation of Economic Cooperation and Development (OECD), investment of less than 10 percent in foreign companies is treated as FPIs. All FPI taken together cannot acquire more than 24 per cent of the paid-up capital of an Indian Company.
FDIs are normally categorised as being Horizontal or Vertical in nature.

 

·         A Horizontal investment refers to the foreign firms establishing the same type of Business operations in the host country as it operates in his home country.

Example; Apple opening up Apple manufacturing unit in India.

·         A Vertical investment refers to the foreign firms establishing different but related business in host countries. Example: Hyundai Motors acquiring or establishing a company in India that supplies car spare parts/raw materials required for manufacturing Cars by Hyundai.

 FPI investor includes Foreign Institutional Investors (FIIs), Foreign Qualified Investors (FQIs).

 

  • Institutional investors are big institutions like Asset Management Companies, Mutual Funds, Insurance Houses etc. RBI has mandated such big institutions to established to make investments in India’s security markets.
  • FQIs are individual investors or associations residing in Foreign countries. FQIs are small individual investors who invest in foreign countries securities.

 

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