Difference Between FDI and Portfolio Investment

FDI vs Portfolio Investment
 

FDI and portfolio investment are both forms of investments made with the aim of generating profits and higher returns. FDI, however, involves a large commitment, larger amount in funding, and cannot enter or leave the market as they please. Portfolio investments are passive investments made in securities in which the investors do not wish to be actively involved in management and decision making. The following article explains both forms of investments and highlights the similarities and differences between FDI and Portfolio Investment.

Foreign Direct Investment (FDI)

FDI (Foreign Direct Investment) as its name suggest refers to an overseas investment made by an entity based in one country. A FDI can be set up through a number of ways, such as through a subsidiary, joint venture, merger, acquisition, or through a foreign associate partnership. FDIs should not be confused with indirect investments such as when a foreign entity invests funds in another country’s stock market. A foreign entity that enters into a FDI will have a substantial amount of control over the company or operations into which the investment is made. Any economy will try to attract more FDI into their country as it results in more jobs, production, create higher demand for local products/raw materials/services, and can result in overall economic growth. Countries that have open economics and will lower regulations will be the most attractive locations for FDIs. An example of FDI would be, a Chinese car manufacturer setting up manufacturing operations in the United States through acquiring a local car manufacturer.

Portfolio Investment

A portfolio is a collection of investments that include a number of investment assets such as stocks, bonds, treasury bills, cash, etc. A portfolio investment is an investment made in assets that collectively make up a portfolio. Investors make portfolio investments everyday by purchasing shares, bonds, Certificates of deposit, and other securities. A portfolio investment is considered to be a passive investment as it does not involve any management activities in the firm in which the investment is made. For example, a shareholder or bondholder in a firm does not have the capacity to make management related decisions and cannot actively control the activities of the firm.

FDI vs Portfolio Investment

There are a number of differences between a FDI and portfolio investment. A FDI allows the investor to be completely involved in the management of the business activities. A portfolio investment, on the other hand, provides much less control and are ideal for investors who are looking for a way, to diversify their investments as a means of reducing risk, while not having to understand how each and every business operates. Furthermore, FDI investments are usually made by large corporations, governments, and large NGOs, whereas portfolio investments are made by hedge funds, mutual funds, and other individual investors.

Summary

• FDI (Foreign Direct Investment) as its name suggest refers to an overseas investment made by an entity based in one country.

• A FDI can be set up through a number of ways, such as through a subsidiary, joint venture, merger, acquisition, or through a foreign associate partnership.

• A portfolio investment is an investment made in assets that collectively make up a portfolio.

• Investors make portfolio investments everyday by purchasing shares, bonds, Certificates of deposit, and other securities.

• A FDI allows the investor to be completely involved in the management of the business activities while a portfolio investment provides much less control in the management.

• Portfolio investments are ideal for investors who are looking for a way, to diversify their investments as a means of reducing risk while not having to understand how each and every business operates.

• FDI investments are usually made by large corporations, governments, and large NGOs, whereas portfolio investments are made by hedge funds, mutual funds, and other individual investors.