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Foreign Investments in India Types and Flows notes-CSEET
Foreign Investments in India Types and Flows notes-CSEET:
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We are now going to discuss the details of CSEET Paper-3 Economics and Business Environment notes – Foreign Investments in India Types and Flows
Foreign Investments in India Types and Flows
Foreign Investments in India Types and Flows notes:
Any investment that is made in India with the source of funding that is from outside of India is a foreign investment. By this definition, the investments that are made by Foreign Corporates, Foreign Nationals, as well as Non-Resident Indians would fall into the category of Foreign Investment.
Types of Foreign Investments
Funds from foreign country could be invested in shares, properties, ownership / management or collaboration. Based on this, Foreign Investments are classified as below.
Foreign Direct Investment (FDI) | |
| Foreign Portfolio Investment (FPI) | Foreign Institutional Investment (FII) |
Details on each of the foreign investment type can be found below:
Foreign Direct Investment (FDI)
FDI is an investment made by a company or individual who us an entity in one country, in the form of controlling ownership in business interests in another country. FDI could be in the form of either establishing business operations or by entering into joint ventures by mergers and acquisitions, building new facilities etc.
Foreign Portfolio Investment (FPI)
Foreign Portfolio Investment (FPI) is an investment by foreign entities and non-residents in Indian securities including shares, government bonds, corporate bonds, convertible securities, infrastructure securities etc. The intention is to ensure a controlling interest in India at an investment that is lower than FDI, with flexibility for entry and exit.
Foreign Institutional Investment (FII)
Foreign Institutional Investment (FPI) is an investment by foreign entities in securities, real property and other investment assets. Investors include mutual fund companies, hedge fund companies etc. The intention is not to take controlling interest, but to diversify portfolio ensuring hedging and to gain high returns with quick entry and exit.
Differences between FDI and FII
| BASIS FOR COMPARISON | FDI | FII |
| Meaning | When a company situated in one country makes an investment in a company situated abroad, it is known as FDI. | FII is when foreign companies make investments in the stock market of a country. |
| Entry and Exit | Difficult | Easy |
| What it brings? | Long term capital | Long/Short term capital |
| Transfer of | Funds, resources, technology, strategies, know-how etc. | Funds only |
| Economic Growth | Yes | No |
| Consequences | Increase in country’s Gross Domestic Product (GDP) | Increase in capital of the country |
| Target | Specific Company | No such target, investment flows into the financial market |
| Control over a company | Yes | No |
Difference between FDI and FPI
| BASIS FOR COMPARISON | FDI | FPI |
| Meaning | FDI refers to the investment made by the foreign investors to obtain a substantial interest in the enterprise located in a different country. | When an international investor, invests in the passive holdings of an enterprise of another country, i.e. investment in the financial asset, it is known as FPI. |
| Role of investors | Active | Passive |
| Degree of control | High | Very less |
| Term | Long term | Short term |
| Management of Projects | Efficient | Comparatively less efficient |
| Investment in | Physical assets | Financial assets |
| Entry and exit | Difficult | Relatively easy |
| Results in | Transfer of funds, technology and other resources | Capital inflows |
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