FOREIGN

INVESTMENT-
TYPES AND
FLOWS
TYPES OF FOREIGN
INVESTMENT

FPI FIIs

Foreign
Investment Offshore
funds

FDI ADRs/GDRs
FOREIGN DIRECT
INVESTMENT (FDI)
 FDI occurs when a firm invests directly in facilities to produce and/or market a product in a
foreign country.
 Foreign direct investment (FDI) is defined as an investment involving a long-term relationship
and reflecting a lasting interest and control by a resident entity in one economy (foreign direct
investor or parent enterprise) in an enterprise resident in an economy other than that of the
foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate).
 It generally takes the form of acquiring a stake in an existing enterprise in the foreign country
or starting a subsidiary to expand the operations of an existing enterprise.
 FDI implies that the investor exerts a significant degree of influence on the management of the
enterprise resident in the other economy.
FOREIGN PORTFOLIO
INVESTMENT (FPI)
 FPI involves investment in foreign financial assets like stocks, bonds, commodities etc.
 This type of investment is not made with the intention of acquiring a controlling interest in the
issuing company.
 Typically, this type of investment is short term in nature and is made to take advantage of
favorable changes in exchange rates or to earn short term profits on interest rate differences.
 It provides the investor with an opportunity to diversify their portfolios and better manage the
associated risk.

DIFFERENCE BETWEEN FDI
AND FPI
Basis FDI FPI
Motive Made for the purpose of Motivated by profit
productive capacity
Participation in management Intention of managerial control No say in the management
Assets Physical Financial
Duration Long-term Short-term
Stability More stable Less stable (volatile)
Impact on Growth Critical driver of economic Give impetus to financial markets
growth
Entry and exit Difficult Easy
CLASSIFICATION OF FDI
By By Nature of
Target/Asset- Business
based view Activity

By Direction By Motive
Basis Of
Classification
CLASSIFICATION- BY
DIRECTION
 On the basis of direction of flow of funds, FDI can be classified into two types.

 INWARD FDI: Inward FDI takes place when foreign capital is invested in local resources.

 OUTWARD FDI: Outward FDI takes place when local capital is invested in foreign resources.
CLASSIFICATION- BY
TARGET/ASSET-BASED
Greenfield • Establishment of wholly new operational facilities from scratch in the
host country.
Investment • Long term

• Two or more independent business entities which are resident in

Mergers different countries combine their assets and operations to form a new
and separate legal entity.

• Purchase of an existing venture

Acquisitions • Can be hostile or friendly

Brownfield • Combination of greenfield and M&As

investment • Infusion of fresh capital and assets after acquisition

CLASSIFICATION- BY NATURE
OF BUSINESS ACTIVITY

 HORIZONTAL FDI: Investment in the same operation or industry

 VERTICAL FDI: Investment in the upstream or downstream operations

 Backward Vertical FDI
 Forward Vertical FDI

 Conglomerate FDI: Investment in unrelated Industry

 CLASSIFICATION- BY MOTIVE
• To take advantage of natural resources
Resource- Seeking • Likely to promote exports in the host economy

• To directly serve that market with local production and distribution rather than through exporting.
Market-seeking • Gain access to large overseas market and to reap the benefits of economies of scale

• To produce cost-effective and competitive global production networks

Efficiency-seeking • Gains from Synergies

Strategic asset- • To acquire strategic assets like innovative technology; management expertise etc. in order to
strengthen firm’s global competitiveness
seeking
BENEFITS OF FDI TO HOST
COUNTRIES
 Resource transfer effects
 Employment effects
 BOP effects
 Effect on competition and Growth
 Revenue to Government
 Less volatility
COSTS OF FDI TO HOST
COUNTRIES
 Adverse effects on Competition
 Adverse effects on BOP
 National sovereignty and autonomy
 Capital intensive technology
BENEFITS OF FDI TO HOME
COUNTRIES
 BOP benefits

 Employment effects

 Acquisition of skills
COSTS OF FDI TO HOME
COUNTRIES
 BOP effects in three ways:
 Capital A/C- Initial capital outflow
 Current A/C- More Imports
 Current A/C- Less Exports

 Employment Effects