In 2023, the global volume of Foreign Direct Investments (FDI) exceeded $1.37 trillion, while Foreign Portfolio Investments (FPI) amounted to $3.2 trillion. However, according to UNCTAD, only 18% of companies engaging in foreign investments achieve sustainable growth in new markets.
In recent years, the COREDO team has implemented dozens of projects on company registration, obtaining financial licenses, and supporting FDI and FPI in Europe, Asia, and Africa. COREDO’s experience confirms that international market success begins with a deep understanding of the differences between these instruments, their legal and tax implications, and compliance specifics.
In this article, I will examine in detail how to distinguish FDI from FPI, the risks and opportunities each type of investment carries, how to structure foreign investments considering regional and sector specifics, and which steps realistically ensure transparency, protection, and return on investments.
FDI and FPI: What’s the Difference?
FDI and FPI – what’s the difference? These two types of foreign investments often appear in economic reviews and reports, but they have fundamentally different goals and mechanisms impacting the economy.
Features and Definition of FDI
A classic example of FDI would be setting up a subsidiary, acquiring a controlling interest, participating in M&A, or forming a joint venture (JV).
In COREDO’s practice, we often encounter requests for structuring FDI for technology companies in Asia, where, apart from capital, the investor brings know-how, access to new markets, and managerial competencies.
What is FPI (Foreign Portfolio Investment)?
FPIs are characterized by high liquidity, the ability to quickly diversify the portfolio, and relatively low involvement in the operational activities of the investment object.
COREDO’s experience shows that FPIs are particularly demanded for entering the financial markets of the EU and Asia, where flexibility and rapid response to market changes are crucial.
FDI and FPI – Differences and Comparison
| Criterion | FDI (Foreign Direct Investment) | FPI (Foreign Portfolio Investment) |
|---|---|---|
| Level of Control | High (management participation) | None (passive investor) |
| Liquidity | Low | High |
| Investment Term | Long-term | Short-term/medium-term |
| Main Instruments | Company share, M&A, JV | Stocks, bonds, ETF |
| Risks | Political, legal, currency | Market, currency, liquidity |
| Compliance/AML | High requirements | Standard requirements |
| ROI | Potentially higher, but slower | Faster, but more volatile |
Differences between FDI and FPI for Business in the EU, Asia, and Africa
Understanding these differences helps companies choose between short-term and long-term investments, and also consider the specifics of regional markets and their risks.
Short-term and Long-term Foreign Investments
FDI is a tool for long-term foreign investment, allowing for large-scale projects, integration into local value chains, and forming strategic alliances. For technology companies in Asia or manufacturing groups in the EU, FDI becomes the basis for entering new markets, implementing innovations, and technology transfer.
For investors focused on short-term profitability, liquidity, and diversification, FPI becomes the optimal choice. For instance, working with the stock markets of Africa or Southeast Asia, portfolio investments minimize entry costs and allow quick responses to market fluctuations.
FDI and FPI: What’s the Difference?
This is especially important for investors interested in long-term presence, business localization, and building a corporate structure that meets international standards.
FPI does not provide the ability to influence company management, and the investor remains a passive market participant. This approach reduces legal and operational risks but limits opportunities for strategic partnership and integration into the local economy.
The Impact of FDI and FPI on the Economy and Financial Market
FDI has a direct impact on the country’s economy: it contributes to job creation, infrastructure development, technology transfer, and workforce qualification.
FPI, in turn, affects the liquidity and depth of the financial market, contributes to the development of stock exchanges but can increase volatility and create risks for financial stability during sharp capital outflows.
FDI and FPI: Taxes and Laws in the EU, Asia, and Africa
FDI and FPI play a crucial role in attracting foreign capital and developing economies in the EU, Asia, and Africa but notably differ in structure, regulations, and tax burdens.
Registration and Licenses for FDI and FPI
Company registration for FDI requires a deep analysis of the corporate structure, selection of the optimal organizational-legal form, preparation of founding documents, and obtaining the necessary licenses. In the EU and Asia, the registration process can take from one to four weeks and includes compliance with KYC/AML requirements and obtaining approvals from relevant regulators.
The COREDO team has repeatedly supported company registration for FDI in the Czech Republic, Estonia, Singapore, and Dubai, developing individual solutions for opening bank accounts, licensing financial services (such as crypto or payment licenses), and building a transparent corporate structure.
International Tax Planning
FDI suggests more complex tax planning: it is necessary to consider profit taxation, dividend repatriation, application of double taxation avoidance agreements, and local tax benefits for foreign investors. For instance, some countries in the EU have special tax regimes for companies undertaking FDI in priority economic sectors.
FPIs are taxed on capital gains, dividends, and coupons, with rates and benefits depending on jurisdiction and investor status.
KYC and Due Diligence for FDI and FPI
Compliance procedures for FDI include comprehensive checks of fund sources, beneficiaries, business model analysis, and compliance with international AML/KYC standards. In some jurisdictions (e.g., Singapore or the UK), due diligence requirements are especially high and include regular audits, transaction monitoring, and reporting to regulators.
For FPI, standard KYC/AML procedures are applied when opening brokerage accounts. However, when working with large portfolios or in countries with increased risks (e.g., in Africa), regulators require enhanced due diligence and constant operation monitoring.
Risks and Returns of FDI and FPI
Risks and Returns of FDI and FPI directly depend on the country’s features, the chosen strategy, and external conditions. Besides potential profits, investors face a spectrum of currency, political, and legal risks that can significantly influence investment outcomes.
In the next section, we will delve deeper into the essence and impact of currency, political, and legal risks on the investment process.
Currency, Political, and Legal Risks
FDI is susceptible to currency fluctuations, political risks (e.g., legislative changes, asset nationalization, profit repatriation restrictions), and legal disputes related to investor rights protection. To mitigate these risks, COREDO recommends using international investment protection mechanisms (BITs), political risk insurance, and structuring deals through jurisdictions with a developed judicial system.
FPI is more sensitive to market volatility, interest rate changes, and liquidity. In periods of political instability or economic crises, sharp capital outflows are possible, requiring prompt portfolio management and diversification across regions and instruments.
ROI for FDI and FPI: Metrics and Assessment Methods
ROI assessment for FDI includes analyzing long-term profitability, asset value growth, management effectiveness, and integration into the local economy.
For FPI, main metrics include portfolio profitability, volatility, the Sharpe ratio, as well as liquidity and correlation with global markets. It’s essential to consider not only absolute profitability but also risks related to currency fluctuations, tax regime changes, and market conditions.
How to Reduce Risks and Increase Returns
For FDI, effective risk minimization strategies are diversification by countries and sectors, insuring political and currency risks, structuring deals considering international compliance and corporate governance standards. In several cases, the COREDO team implemented a multi-tier holding structure, ensuring asset protection and flexibility in exiting investments.
It is also crucial to plan the exit strategy from investments ahead of time to minimize costs and avoid tax traps.
FDI or FPI – What to Choose for Business?
FDI or FPI: What to choose for business?
To make a balanced decision between FDI and FPI, it is crucial to understand the key differences and evaluate which option will be most suitable for specific goals and projects.
Criteria for Choosing for Business and Projects
The choice between FDI and FPI depends on the strategic objectives of the investor, business scale, industry specifics, and the investment climate of the region. For companies focused on long-term presence, creating production capacities, or developing R&D, FDI is the optimal solution. For those seeking quick diversification and high liquidity, FPI is suitable.
At the same time, for entering the financial markets of the EU or Africa, where flexibility and minimizing operational costs are important, FPI provides the optimal risk-return ratio.
Examples of FDI and FPI: Successful and Unsuccessful Cases
COREDO’s practice confirms that successful FDI projects are realized where an investor pre-conducts comprehensive due diligence, builds a transparent corporate structure, and implements best AML and compliance practices.
Meanwhile, unsuccessful FPI cases are often associated with an insufficient assessment of political and currency risks, incorrect instrument or jurisdiction selection.
Conclusions and Tips for Investors and Managers
The choice between FDI and FPI is not just about profitability; it’s a strategic decision that determines the future of business in the international market. COREDO’s practice shows that success is ensured by comprehensive due diligence, a transparent corporate structure, competent tax planning, and implementing modern compliance procedures.
Checklist for Self-Assessing Investment Strategy:
- Define strategic goals: long-term presence (FDI) or diversification and liquidity (FPI).
- Analyze the investment climate of the region: level of regulation, tax regimes, political and currency risks.
- Conduct comprehensive due diligence of the investment object and partners.
- Develop a corporate structure considering international compliance and AML standards.
- Assess tax consequences and optimization opportunities.
- Implement investment protection mechanisms: insurance, BITs, structuring through reliable jurisdictions.
- Consider exit and profit repatriation strategies.
- Regularly review the investment strategy based on market and regulatory changes.
The COREDO team is ready to be your reliable partner at all stages of implementing FDI and FPI: from registering legal entities and obtaining licenses to building an effective compliance system and supporting cross-border transactions.