Fdi vs fpi

Foreign Direct Investment
(FDI) and Foreign Portfolio
Investment (FPI)
Kanchan Kandel
BBA

Modes of International
Business
The hierarchy of modes of Int’l Business from the least
amount to risk to the greatest is as follows:
Int’l Trade (Import & Export)
License/Franchise Agreements
Joint Ventures
Foreign Direct Investment
Foreign Portfolio Investment
kanchan.kandel399@gmail.com

Franchising Licensing
Governed by: Securities law Contract law
Registration: Required Not required
Territorial
rights:
Offered to franchisee Not offered; licensee can sell
similar licenses and products
in same area
Support and
training:
Provided by franchiser Not provided
Royalty
payments:
Yes Yes
Use of
trademark/log
o:
Logo and trademark retained
by franchiser and used
by franchisee
Can be licensed
Examples: McDonalds, Subway, 7-11,
Dunkin Donuts
Microsoft Office
control: Franchiser exercise control
overfranchisee.
licensor does not have control
over licensee

Licensing
It is an arrangement in which a firm (the licensor) grants
legal permission to another firm or individual (the
licensee) to use specified components of its production
or marketing process for a limited period of time.
The licensed components may include patents,
copyrights, trademarks, technology, managerial skills
and so forth. The licensee then produces and markets a
product in the foreign country similar or different to one
the licensor produces and markets at home.

Franchising
It is an arrangement in which a firm (the franchisor)
grants a package of support services to another firm or
individual (the franchisee) to undertake production
and/or marketing in a specified location. Franchise
contracts usually cover more aspects of the foreign
operation and have a longer duration than the licensing
contracts.
The package may include product input supplies,
production equipment, ongoing management assistance,
advertising and promotional materials, strategic
planning and so on. Franchising may also involve some
financing, particularly in the early stages of developing
the foreign business.kanchan.kandel399@gmail.com

Cont..
Under both licensing and franchising agreements, the
licensee/franchisee compensates the
licensor/franchisor with royalties and fees.

Joint Venture
Partial commitment for capital investment
supplemented by remaining commitment for capital
investment by another form for a business project.

Merger & Acquisitions
- Horizontal M & A: In this, two or more firms engaged in
similar activities join hands. For example, if two firms
manufacturing automobiles merge, it will be called horizontal
merger. It helps create economies of scale because the size of
the firm becomes larger to reap such gains.
- Vertical M & A: This occurs among firms involved in different
stages of the production of a single final product. Thus, if an
oil exploration firm and a refinery unit merge, it will be called
a vertical merger. It reduces cost of transportation and of
communicating and coordinating production.
- Conglomerate M & A: It involves two or more firms in
unrelated activities.

Foreign Direct Investment
(FDI)
It involves the establishment of new production facilities
in foreign countries . Through FDI, a company becomes
multinational.
FDI could be a greenfield investment i.e., building brand
new production facilities or brownfield investment i.e.,
purchasing existing building and other assets.

Reasons for Foreign
Investment
 Trade Barriers
 Imperfect labor market
 Intangible Assets
 Vertical integration
 Product life cycle
 Shareholder diversification services

Trade Barriers
• Government may impose tariffs, quotas, embargo and
other restrictions on export and imports goods and
services hindering the free flow of these products across
national boundaries.
Classic example for trade barrier motivated FDI is
Honda’s investment in Ohio. Since the cars produced in
Ohio would not be subject to US tariffs and quotas,
Honda could circumvent these barriers by establishing
production facilities in the United States.

Imperfect Labor Market
• Labor services in a country can be severely
underpriced relative to its productivity because
workers are not allowed to freely move across
boundaries to seek higher wages. Among all factor
markets, the labor market is the most imperfect.
• When workers are not mobile because of
immigration barriers, firms themselves should move
to the workers in order to benefit from the
underpriced labor services. This is one the main
reasons MNCs are making FDIs in less developed
countries such as Mexico, China, India and
Southeast Asian countries.kanchan.kandel399@gmail.com

Intangible Assets
• MNCs may undertake investment projects in a foreign
country, despite the fact that local firms may enjoy
inherent advantages. This implies that MNCs should
have significant advantages over local firms. Examples
are: technological, managerial, and marketing know
how, superior R&D capabilities, and brand names.
• Coca-Cola has invested in bottling plans all over the
world rather than say, licensing local firms to produce
Coke. The reason is it wanted to protect the formula for
its famed soft drink. If Coca-Cola licenses a local firm to
produce Coke, it has no guarantee that the secrets of the
formula will be maintained.

Product Life Cycle
- FDI takes place when a product reaches maturity and
cost becomes an important consideration. FDI can thus
be interpreted as a defensive move to maintain the firm’s
competitive position against its domestic and foreign
rivals.
- Personal computers ( PCs) were first developed by US
firms ( such as IBM and Apple Computer) and exported
to overseas markets. As PC’s became a standardized
commodity, however, the US became a net importer of
PCs from foreign producers based in such countries as
Japan, Korea and Taiwan as well as foreign subsidiaries
of US firms.kanchan.kandel399@gmail.com

Shareholder Diversification
Services
• If investors cannot diversify their portfolio holdings
internationally because of barriers to cross-border
capital flows, firms may be able to provide their
shareholders with indirect diversification services by
making direct investments in foreign countries.

Global FDI Market• During the five year period during 1997-2001, total
annual worldwide FDI flows amounted to about USD
830 billion on average. The United States is the largest
recipient, as well as initiator, of FDI. Besides USA,
France, Germany, the Netherlands and UK are the
leading sources of FDI outflows, whereas the UK,
China, France, Germany and the Netherlands are the
major destinations for FDI in the five year period.

FDI in Nepal
• History of foreign investment in Nepal began from the
establishment of Biratnagar Jute Mill in 1936.
• Post-1990, market liberalization has played a vital role in
attracting foreign investment.
• But the trend, unfortunately could not continue, as the
post-1990 governments did not realize that the free
market economy could not survive only on political
foundation. Without social foundation, it became
meaningless.

All data are sourced from the latest UNTCAD’s World Investment Report 2011. Here is a WIR’s FDI profile of Nepal
Total FDI inflows
FDI inflows (US$ million) 1990-1995 1996-2000 2001-2005 2006-2010 2009 2010
Afghanistan -0.01 571.81 566.38 1041.65 185.00 75.65
Bangladesh 125.85 4608.81 2338.69 4158.61 700.16 913.30
Bhutan 2.25 18.93 17.18 138.28 14.68 11.69
India 4220.69 43360.95 28827.96 148512.08 35648.78 24639.92
Maldives 41.57 249.65 182.86 565.43 112.34 163.82
Nepal 8.16 89.80 31.70 77.89 38.56 38.99
Pakistan 2591.56 7556.31 5059.00 19655.00 2338.00 2016.00
Sri Lanka 658.88 2191.96 1102.01 2717.20 404.00 477.60
Total FDI inflows
FDI inflows (US$ billion) 1990-1995 1996-2000 2001-2005 2006-2010 2009 2010
World 1349.12 7825.63 3750.82 7605.60 1185.03 1243.67
Developing economies 423.78 2214.48 1199.64 2744.64 510.58 573.57
South Asia 7.53 72.40 51.56 188.43 42.46 31.95
Least developed countries (LDCs) 8.40 79.49 56.34 132.93 26.54 26.39
Landlocked developing countries 7.81 65.02 42.29 102.30 26.19 23.02

Nepal’s Prospect in tapping FDI
The FDI potential in Nepal can be segregated into three
types:
FDI potential in short term
FDI potential in medium term
FDI potential in long term

Cont…
• FDI Potential in short term
- Tourism
- Export Manufacturing under Trade Preferences
• FDI Potential in medium term
- Hydropower for the Indian and domestic market
- Agro based industries
- Privatization of PSUs
• FDI Potential in long termkanchan.kandel399@gmail.com

Tourism
• Nepal have plenty of area to attract tourist like
mountain, one horn rhino, culture and tradition.
• Low expenditure also attract tourist.
To increase FDI in Tourism following step should need
Removal of the ban on overseas tour operators’ and
travel agencies ownership of operations in Nepal
Formulation of a tourism development certificate &
incentive
Structuring of tourism development zones

Export Manufacturing under trade
preferences
 In backdrop of Nepal’s trade treaty with India, there is
potential for international investors to invest in Nepal
keeping in view the opportunities to export the products
to India.

Hydropower
• Nepal has a huge potential of hydro power that comes to about
83,000 MW out of which 43,000 MW is economically viable.
• Until now, Nepal has not been able to exploit much of its
potentiality and the people in Nepal still face severe power
shortages.
• In order to harness and develop hydropower, private sectors
were involved to carry out small and medium sized hydro power
projects.
• Similarly the government is encouraging private foreign
investment in this sector.

FDI Potential in Agro-based
industries
Nepal has potential for producing vegetable and flower
seeds. It also has an ideal climate for cut flowers,
strawberries, mushrooms and other crops.

FDI Potential in Regional
Services
• Nepal has the opportunity in the long run to be an
offshore services centre for regional countries, especially
India.
• These services could include offshore financial services for
Indian residents and location of basic business and
professional and back-office services focused on regional
markets.
• Nepal's core attributes are a temperate climate, low wage
costs, a smaller and more accessible bureaucracy, and an
attractive expatriate lifestyle.

Strength
Location between the two potentially largest markets in
the world: China and India
 Trainable and low-cost workforce
Substantial natural and cultural assets
 Small and accessible bureaucracy and a generally
business-friendly Government
Macroeconomic stability and a relatively liberal economy

Weakness
• Lack of direct access to airports
• Poor ground transportation
• Lack of skilled labor and technological expertise
• Inadequate power
• Inadequate water supply
• Few local raw materials
• Non-transparent and arbitrary tax administration
• Inadequate and obscure commercial legislation
• Rigid and intrusive labor legislationkanchan.kandel399@gmail.com

Opportunities
Tourism, including sports and adventure tourism, health
tourism and cultural tourism
A variety of niche agricultural and agro-business activities
Hydropower generation and infrastructure development
generally
IT-based services

Threats
Land lock country
Natural infrastructure
Giant neighbor countries

Foreign portfolio Investment
(FPI)
• A grouping of investment assets that focuses on
securities from foreign markets rather than domestic
ones.
• An international portfolio is designed to give the investor
exposure to growth in emerging and international
markets and provide diversification.

Benefit of FPI
Increases the liquidity of domestic capital markets, and
can help develop market efficiency as well
Researching new or emerging investment opportunities
Development of equity markets and the shareholders’
voice in corporate governance.
Introducing more sophisticated instruments and
technology for managing portfolios

FDI FPI
Involveme
nt - direct
or
indirect:
Involved in management and
ownership control; long-term interest
No active involvement in management.
Investment instruments that are more easily
traded less permanent and do not represent a
controlling stake in an enterprise.
Sell off: It is more difficult to sell off or pull
out.
It is fairly easy to sell securities and pull out
because they are liquid.
Comes
from:
Tends to be undertaken by
Multinational organizations
Comes from more diverse sources e.g. a small
company's pension fund or through mutual
funds held by individuals; investment via
equity instruments (stocks) or debt (bonds) of
a foreign enterprise.
What is
invested:
Involves the transfer of non-financial
assets e.g. technology and
intellectual capital, in addition to
financial assets.
Only investment of financial assets.
Stands
for:
Foreign Direct Investment Foreign Portfolio Investment
Volatility: Having smaller in net inflows Having larger net inflows
Managem
ent:
Projects are efficiently managed Projects are less efficiently managedkanchan.kandel399@gmail.com

Risks Foreign Investment vs.
Domestic Investment
Investment in foreign companies carry some additional risks when
compared to domestic investment. These risks stem from the
uncertainties related to the conversion of the realization proceeds
into the domestic currency which can be broadly classified under
Country risk as follows:
• Country Risk
 Political risk (Risk of host government interference)
 Governance risk (The ability to exercise effective control over the
foreign affiliate within the country’s legal environment)
 Transfer risk (The ability to move capital freely and efficiently in and
out of the host country)
 Foreign Exchange Risk (The value of the local currency cash flows
generated and remitted to the parent in parent currency terms.)

Fdi vs fpi

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