Foreign portfolio investment (FPI) consists of securities and other financial assets passively held by foreign investors. It does not provide the investor with direct ownership of financial assets and is relatively liquid depending on the volatility of the market. Foreign portfolio investment differs from foreign direct investment (FDI), in which a domestic company runs a foreign firm, because although FDI allows a company to maintain better control over the firm held abroad, it may face more difficulty selling the firm at a premium price in the future.
Foreign portfolio investment is part of a country’s capital account and shown on its balance of payments (BOP). The BOP measures the amount of money flowing from one country to other countries over one monetary year. It includes the country’s capital investments, monetary transfers, and the number of exports and imports of goods and services.
Differences Between FPI and FDI
FPI lets an investor purchase stocks, bonds or other financial assets in a foreign country. Because the investor does not actively manage the investments or the companies that issue the investments, he does not have control over the securities or the business. However, since the investor’s goal is to create a quick return on his money, FPI is more liquid and less risky than FDI.
In contrast, FDI lets an investor purchase a direct business interest in a foreign country. For example, an investor living in New York purchases a warehouse in Berlin so a German company can expand its operations. The investor’s goal is to create a long-term income stream while helping the company increase its profits.
The investor controls his monetary investments and actively manages the company into which he puts money. He helps build the business and waits to see his return on investment (ROI). However, because the investor’s money is tied up in a company, he faces less liquidity and more risk when trying to sell his interest.
The investor also faces currency exchange risk, which may decrease the value of his investment when converted from the country’s currency to U.S. dollars, and political risk, which may make the foreign economy and his investment amount volatile.
Example of Foreign Portfolio Investment
In 2016, the United States received approximately 84% of total remittances, which was the majority of outflows for FPI. The United Kingdom, Singapore, Hong Kong and Luxembourg rounded out the top five countries receiving FPI, with approximately 81% of the combined share. Net inflows from all countries were $451 million. Outflows were approximately $1.3 billion. Approximately 84% of investments were in Philippine Stock Exchange-listed securities pertaining to property companies, holding firms, banks, telecommunication companies, food, beverage and tobacco companies.