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.
This statistic is not just impressive – it highlights the gap between desired and actual outcomes for most international investors.
Why do some foreign investment strategies lead to exponential growth, while others result in losses and legal disputes? How can one correctly choose between FDI and FPI for business in the EU, Asia, or Africa, not just to enter the market, but to also establish a lasting presence?
In an environment of tighter regulations, rising compliance risks, and high market volatility, the choice between Foreign Direct Investment and Foreign Portfolio Investment becomes not just a question of profitability, but a strategic decision that determines the long-term sustainability of a business.
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.
Read to the end, and you will receive not only expert analysis but also practical recommendations that will help you choose the optimal foreign investment strategy for your business.
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.
To understand how FDI and FPI affect business and financial markets, let’s dissect their key features and definitions.
Features and Definition of FDI
Foreign Direct Investment (FDI): These are direct foreign investments involving acquiring a share in a foreign company to establish control over management and development strategy.
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).
The key feature of FDI is active involvement in company management, technology transfer, corporate governance development, and job creation in the host country.
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.
FDI allows for implementing long-term strategies related to production localization, forming strategic partnerships, and integrating into the local economy.
What is FPI (Foreign Portfolio Investment)?
Foreign Portfolio Investment (FPI): These are portfolio foreign investments where an investor acquires
financial instruments (stocks, bonds, ETFs) of foreign companies without an intention to manage.
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.
In practice, FPIs are chosen by institutional investors, funds, and individuals focused on short- or medium-term profitability, as well as on risk minimization through asset distribution across different markets and sectors.
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
The differences between FDI and FPI for business in the EU, Asia, and Africa define the strategy for entering foreign markets, the degree of control over investments, and planning horizons.
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.
On the contrary, FPI provides flexibility and the ability for quick market entry and exit.
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?
The key difference of FDI is active control over assets and the ability to influence corporate governance, development strategy, and staffing policy of the recipient company.
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.
For example, FDI inflow into the Czech Republic in the high-tech sector allowed the country to become a leader in electronics exports in the EU.
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.
An example is the experience of some African countries where sharp fluctuations in portfolio investments led to currency devaluations and increased market risks.
Thus, despite the differences in the nature and consequences of FDI and FPI, both instruments play an essential role in economic development, underscoring the relevance of analyzing their tax and legal regulation in various regions.
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.
When entering new markets, investors face various legal requirements and registration procedures for FDI and FPI, shaping the access and conditions of operation in each country.
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.
For FPI, company registration is not always mandatory: an investor can operate through brokerage accounts or
investment funds. However, when managing large portfolios or working with institutional investors, creating an SPV (Special Purpose Vehicle) is often required to optimize tax burdens and enhance transparency.
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.
Solutions developed by COREDO allow for optimizing tax burdens through the use of international structures, funds, and agreements between countries.
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.
COREDO’s experience shows that implementing automated monitoring systems and regular staff training significantly reduces compliance risks and boosts trust from partners and regulators.
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.
These aspects require special attention when analyzing FDI and FPI opportunities and threats.
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.
In COREDO’s practice, metrics like IRR (Internal Rate of Return), NPV (Net Present Value), as well as operational efficiency and business sustainability indicators are used.
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.
For FPI, key tools include portfolio diversification, using hedging instruments (forwards, options), regular rebalancing, and monitoring macroeconomic and political factors.
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?
This question arises for companies looking for opportunities for development and attracting external investments.
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.
For instance, investments in Asia’s high-tech sectors require deep immersion into the local market, partnerships with local companies, and adhering to complex regulatory requirements, making FDI the preferred tool.
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.
For example, when supporting a European manufacturing company entering the Singapore market, the COREDO team ensured the obtainment of all necessary licenses, tax structure optimization, and intellectual property protection, allowing the client to not only gain a foothold in the market but also scale the business in the region.
Meanwhile, unsuccessful FPI cases are often associated with an insufficient assessment of political and currency risks, incorrect instrument or jurisdiction selection.
One of COREDO’s clients faced a sharp currency devaluation in an African country, leading to substantial portfolio investment losses. After restructuring the portfolio and implementing hedging tools, income stability and further risk mitigation were achieved.
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.
Our experience confirms that only a comprehensive and strategic approach to foreign investments ensures sustainable growth and protection of business interests in the context of global competition.
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