FDI, FII and FPI – Different Types of Foreign Investments
There are multiple classes of foreign investments. On the basis of investment destination, these foreign investments are classified into three popular classes- FDI, FII, and FPI. This post discusses these three types of foreign investments.
There is a plenty of investment in India that come from foreign countries. These investments are in the form of FDI, FII, and FPI.
What is Foreign Investment?
Foreign investment may be defined as the flow of capital from one country to another in order to acquire ownership in the domestic company or other kinds of domestic assets. For example, any investment made in India which has the source of funding outside India will be termed as a foreign investment. In this type of investment, the foreign investors may have the active role in management as a part of their investment.
Foreign investments may be made by the individuals as well as corporates. But mostly this type of investment is made by corporates with enough assets that wish to expand their reach globally. All foreign investment come in the form of FDI, FII, and FPI.
With an increase in the concept of globalization, multinational companies (MNCs) are investing in various countries across the world.
Types of Foreign Investments
All the foreign investment fall into various classes like commercial loans, official flows, FDI, FII, FPI etc. Following are the popular classes of foreign investments:-
- Foreign Direct Investment (FDI),
- Foreign Institutional Investment (FII), and
- Foreign Portfolio Investment (FPI)
Foreign Direct Investment (FDI)
When a company located in any country invests in another company which is located in a different country in order to acquire controlling ownership is called the Foreign Direct Investment (FDI). This investment can be made by an individual or by a corporate. This type of investment is welcomed in an open economy where skilled workforce with potential growth prospects is proposed to the investors.
The FDI is made in many ways. It includes the opening of a subsidiary or associate company in a foreign country, or acquiring controlling ownership of a foreign company, or merging or joint venture with a foreign company.
There are three types of FDI:-
- Horizontal: When a company does the same type of business in a foreign country what it does in the home country. Example- Mobile phone companies opening stores in India.
- Vertical: When a company does a different but related business in a foreign country. Example A car manufacturing company acquires dealership in India.
- Conglomerate: When a company starts or invests in a totally different business in a foreign country.
Foreign Portfolio Investment (FPI)
This type of investment consists of securities such as stocks, bonds, debentures held by foreign investors. Foreign Portfolio Investment (FPI) is different from Foreign Direct Investment (FDI). In FPI, the investor does not hold the controlling ownership of the company. The only goal of the investor in this type of investment is to create a good return on the invested amount. It is less risky than FDI. These portfolio investments are made directly by the investor or it is managed by financial professionals.
Foreign Institutional Investment (FII)
The Foreign Institutional Investment (FII) is a type of foreign investment in which the investor, mostly investment fund, who is investing in a country is registered in an outside country. Institutional investors are generally mutual funds, pension funds, insurance companies, and hedge funds. This type of foreign investment is very much popular in India. Investors in this class are generally large investors like banks, large corporates buyers or representatives of large institutions. These investors take a position in the financial market of the foreign country on behalf of their home country.
India is a country with the highest volume of foreign institutional investment. Since India is a developing economy and developing economies provide higher growth potential. This is the reason why India is a favourite destination of FIIs. These all investments are monitored by the Securities and Exchange Board of India (SEBI). SEBI has more around 1450 FIIs registered with it. All FIIs are allowed to invest in India only through the primary and secondary capital markets.
Tags: #FDI #FPI #FII #Foreign Investment