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What Are the Pros and Cons of Foreign Direct Investment and Foreign Portfolio Investment?

By Motley Fool Staff – Mar 22, 2016 at 8:42PM

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Take your investing on a trip abroad!

While some prefer to invest in domestic opportunities, others are more likely to invest their money abroad. With foreign direct investment, or FDI, an investor will establish a direct business interest in a foreign country, whereas with foreign portfolio investment, or FPI, an investor will purchase assets like stocks or bonds in a foreign country.

Foreign direct investment
FDI typically means forming a long-term interest in the success of another company. An example of FDI would be an investor purchasing a factory or warehouse so that a growing company in a foreign country can expand its operations. The intent with FDI is typically to help make a business more profitable and generate a return on investment based on that company's long-term success.

Foreign portfolio investment
Whereas FDI involves an investment in a foreign business, FPI involves the purchase of securities that can be easily bought or sold. The intent with FPI is generally to invest money into another country's stock market with the hope of generating a quick return.

While FDI and FPI both involve putting money into a foreign country, the two investment options differ considerably. With FDI, investors are able to exert control over their investments and are typically actively involved in the management of the companies they invest in. With FPI, investors do not get a say in how their investments pan out because they're not actively involved in the management or operations of the companies they're invested in. Rather, those who take an FPI approach are just like individual U.S. stockholders who generally don't get to make business decisions on behalf of the companies whose stocks they own.

Another significant different between FDI and FPI is that investors with an FDI approach are generally willing to be in it for the long haul. Because it can take time to build up a company, those who go the FDI route typically need to be patient in order to see a return on the money they put in. With FPI, investors tend to take a shorter-term approach.

Finally, FPI is generally considered to be a more liquid and less risky investment option than FDI. Because foreign securities are traded regularly, an investor looking to liquidate a foreign portfolio can sell off assets like stocks or bonds with relative ease. With FDI, investment dollars are more intricately tied up in a specific business, which makes it harder for investors to exit their positions.

When deciding whether to take an FDI or FPI approach, investors should consider their appetite for risk and timeframe for seeing a return on investment. Additionally, investors should consider other factors that might make investing in a foreign country a more dangerous prospect, such as political upheaval and currency exchange risk.

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