There are two categories of foreign investment of international scope: FPI (foreign portfolio investment) and FDI (foreign direct investment). FDI is a term that refers to an investment of international level where an investor gains a lasting profit from a business located in another country. FDI can take many forms but commonly it pertains to adding improvements to an existing facility (property, equipment, or plants) or either buying or construction a factory in a different country. FDI includes all manners of capital contributions. The UN Conference on Trade and Development claims that the FDI expands rapidly these days, backed by more than 65,000 transnational corporations with over 850,000 foreign affiliates. Investors in FDI earn profits in a variety of forms including royalty, management fees, retained earnings, and dividends.
FPI is an investment tool that can be traded rather easily, less permanent, and does not have a representation of controlling stake in an enterprise. Instruments used in FPI include equity tools (stocks) or debt (bonds), all of which does not represent a long-term profit. FPI returns profit in the forms of dividends or interest payments.
Between the two types of investment, FDI is one that many multinational corporations undertake. However, FPI can originate from a lot of different sources such as individuals’ mutual funds or a pension from small companies. FDI and FPI may not be easily discernible since some of their aspects overlap with one another, especially in terms of investment in stock. The most common line drawn between the two is based on ownership percentage. FDI requires 10% or more ownership while FPI involves less than 10%. The ownership percentage denotes the limit of voting power an investor may possess within the recipient business. FPI may or may not entail voting rights. FDI, on the other hand, does not allow an investor to have control over the recipient but it makes it possible for them to influence certain aspects.