Foreign portfolio investment (FPI) consists of securities and other financial assets held by investors in another country. It does not provide the investor with direct ownership of a company’s assets and is relatively liquid depending on the volatility of the market. Along with foreign direct investment (FDI), FPI is one of the common ways to invest in an overseas economy. FDI and FPI are both important sources of funding for most economies.
With FPI—as with portfolio investment in general—an investor does not actively manage the investments or the companies that issue the investments. They do not have direct control over the assets or the businesses.
In contrast, foreign direct investment (FDI) lets an investor purchase a direct business interest in a foreign country. For example, say an investor based in New York City purchases a warehouse in Berlin to lease to a German company that needs space to expand its operations. The investor’s goal is to create a long-term income stream while helping the company increase its profits.
This FDI investor controls their monetary investments and often actively manages the company into which they put money. The investor helps to build the business and waits to see their return on investment (ROI). However, because the investor’s money is tied up in a company, they face less liquidity and more risk when trying to sell this interest. The investor also faces currency exchange risk, which may decrease the value of the investment when converted from the country’s currency to the home currency or U.S. dollars. An additional risk is with political risk, which may make the foreign economy and his investment shaky.