Short Answer Questions · Q8
Q.Distinguish between Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI).
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✓ Free question
Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) both bring foreign capital into a business, but they differ in several important respects.
| Basis | Foreign Direct Investment (FDI) | Foreign Portfolio Investment (FPI) |
|---|---|---|
| Control | Seeks a lasting, controlling or influential management interest | No control over management is sought; purely a financial investment |
| Form | Setting up a subsidiary, joint venture, or acquiring a controlling shareholding | Buying shares, bonds or other securities through the stock/bond market |
| Permanence | Generally long-term and stable | Can be withdrawn relatively quickly; more volatile |
| Liquidity | Low -- not easily or quickly sold off | High -- can usually be bought and sold quickly on the market |
| Regulatory route | Examined under the country's foreign investment/FDI policy | Regulated through the securities market regulator |
The essential distinction to remember is that FDI is about acquiring control and building a lasting presence in the foreign business, while FPI is about earning a financial return through the market without any say in management.
✓Final answer
FDI is a long-term, controlling investment made to acquire management influence in a foreign business, while FPI is a liquid, non-controlling investment in a foreign company's shares/bonds made purely for financial return.
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