Question

what captures the essential differences between the motivation to do foreign portfolio investment (FPI) as opposed to the motivation to do foreign direct investment (FDI).

Answer 1

The motivation for investing in Foreign Direct Investment (FDI) are:

(1) FDI investors are involved in the management of a company and has the power to take important decisions in the company. FPI investors cannot be involved in the management of the company and cannot take important decisions in the company even if they want to excise their control.

(2) When an investor makes Foreign Direct Investment (FDI) they get access to the markets and the resources in a foreign country.

(3) The FDI's investors cost of production also reduces mostly when they invest in a developing country because they can avail of the cheap labour and other inputs in the developing country.

The motivation for investing in Foreign Portfolio Investment (FPI) are:

(1) Foreign Portfolio Investors can easily sell their assets when the situation in the foreign country in which they are investing becomes unstable. Thus, their investment is more liquid than Foreign Direct Investors.

(2) When investors are looking to make good short term gains, then they invest in another foreign country where the return is higher than their own country.

(3) If the investor makes an investment in a foreign country where the currency is appreciating continuously than their own country, then they can also benefit from the increasing exchange rates along with the interest and dividends they are receiving from their investments. For example, an US investor invest $1000 in India when the value of $1 was 70 Indian Rupee. Now, if India's currency appreciates to $1 = 60 Indian Rupee then the investor who is investing in India can get additional 10 Indian Rupees for every dollar invested in India.