Both FDI and FPI are important sources of funds to drive domestic economic growth. FDI raises the country’s productive capacity, creates jobs and, if done right, deepens linkages in the domestic supply chain, creates and develops economic clusters, promotes technology transfer and economic complexity, and raises overall productivity and income of the people. FPI helps to develop the capital markets, allowing companies to raise capital more easily, which goes on to underpin entrepreneurship, innovation, growth and, of course, jobs creation and higher incomes.
Foreign capital, as an external source of funds for investments, plays a vital role in driving economic development, especially for emerging countries where there are likely limited savings relative to the amounts required to rapidly grow their economies. This much is obvious.
There are two distinct types of foreign capital: foreign direct investment (FDI) and foreign portfolio investment (FPI). FDIs are long-term investments in assets (for example, factories, companies and infrastructure) where the foreign investor has significant control or ownership. FPI, on the other hand, is typically short-term money flows into domestic financial assets, such as stocks and bonds.
