Understanding FDI and FPI

Introduction

Foreign investment is a key driver of economic growth for emerging economies. India, like many developing countries, attracts two main types of foreign investments: Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). Both bring in capital from abroad but have different characteristics and impacts on the economy. This blog post provides an in-depth explanation of FDI and FPI, outlines the key differences between them, and analyzes India’s FDI and FPI inflow trends over the last five years (2020–2024). We will also compare India’s investment trends with those of other emerging economies such as China, Vietnam, and Bangladesh, discussing the factors influencing these trends and how India is positioned in the global investment landscape.

What are FDI and FPI?

Foreign Direct Investment (FDI): FDI refers to an investment from one country into business interests in another country with the intention of establishing a lasting interest and a degree of control in the enterprise. In practice, this usually means a foreign investor acquires a significant stake (often defined as at least 10% ownership) in a company or project abroad, or builds new facilities (greenfield investments). Because FDI investors have a controlling ownership, FDI typically involves direct management, technology transfer, and long-term commitment to the host country. For example, a foreign company setting up a manufacturing plant or acquiring a substantial share in an Indian company would be FDI. FDI can take forms like equity investments, reinvested earnings of foreign companies, and intra-company loans between parent firms and their affiliates

Foreign Portfolio Investment (FPI): FPI, in contrast, refers to investments in financial assets such as stocks, bonds, or other securities of a foreign country without seeking control over the business. These are passive holdings by foreign investors who are looking for financial returns, not management influence. FPIs can be made by individuals, institutional investors, or funds, and they typically involve buying shares in public companies, government bonds, or other financial instruments in a foreign market. Because portfolio investors do not exercise managerial control, their investments are usually more short-term and liquid – they can be sold quickly based on market conditions. In essence, FPI is often called “hot money” because it can flow in and out of a country’s stock and bond markets rapidly, influenced by changes in market sentiment, interest rates, or global risk appetite. FPI shows up in a country’s capital account in the balance of payments and is sensitive to factors like economic stability, market performance, and comparative interest rates.

Key Differences Between FDI and FPI

FDI and FPI differ on several fundamental dimensions:

• Degree of Control: FDI implies a significant ownership stake and management control in the foreign business. The investor often influences or directly manages operations. In FPI, the investor has no control over business decisions – they are simply a shareholder or bondholder. This is the most crucial difference: FDI investors are like co-owners, whereas FPI investors are passive financiers.
• Investment Horizon: FDI is generally a long-term investment. Because it involves establishing or acquiring businesses, FDI is committed capital that typically remains in the country for a longer duration. FPI is often short-term or medium-term – investors can enter and exit markets quickly. For instance, buying stocks in an emerging market might be a short-term move to earn profits, whereas building a factory is a long-term bet on the economy
• Nature of Investment: FDI usually goes into physical assets or direct business expansion – e.g. factories, infrastructure, or acquiring companies. It often brings along technology transfer, new jobs, and expertise into the host country’s economy. FPI is purely financial – it goes into paper assets like equities and debts. While FPI can provide capital to businesses and government (through bond purchases), it doesn’t directly create new productive capacity or jobs in the way FDI projects do.
• Stability of Flows: FDI flows are relatively stable and less prone to quick reversals. Since it’s harder to liquidate a factory or sell a large business stake overnight, FDI tends to stay even during economic ups and downs, unless fundamental conditions change. FPI flows are much more volatile – foreign portfolio investors can pull out capital at the first sign of trouble or move funds to chase higher returns elsewhere. This volatility means FPI can cause quick swings in exchange rates, stock prices, and liquidity conditions in the host country’s financial markets.
• Risk & Return Profile: From the host country’s perspective, FDI is often preferred for development as it is associated with higher commitment – the foreign investor shares business risk and has a stake in the country’s economic success. FDI also typically involves higher entry costs and regulatory hurdles (government approvals, joint venture requirements, etc., depending on country policy). FPI is easier to undertake (often just requiring a trading account in the local market) and is driven by financial risk-return considerations. For the investor, FDI can be riskier due to its illiquid, long-term nature and exposure to host country business conditions, whereas FPI offers easier exit and diversification but also exposure to market volatility.

In summary, FDI is like planting roots in an economy, while FPI is more like picking fruits from its markets. Both are important: FDI tends to contribute more to real economic growth (factories, infrastructure, jobs), whereas FPI contributes to the development and liquidity of financial markets. Policymakers track both closely, as a surge or withdrawal of either can significantly impact the economy’s performance.

Trends in India’s FDI and FPI Inflows (2020–2024)

The period from 2020 to 2024 has been eventful for capital flows into India, marked by the COVID-19 pandemic, shifts in global economic conditions, and changing investor sentiments.

India’s FDI Inflows (2020–2024)

The table below summarizes India’s FDI inflows in the last 5 years

FDI Inflows in India: 2020 to 2024
Year	FDI Inflows (USD Billion)	% Change YoY	Key Highlights
2020	87.55	+10% approx.	Highest-ever FDI; major deals in digital & retail (e.g., Reliance Jio) during pandemic recovery
2021	74.01	-15%	Decline due to base effect; continued strong flows in IT, pharma, fintech
2022	49.4	-33%	Stable inflows but fewer big-ticket deals; global headwinds begin to show
2023	28.0	-43%	Sharp drop; India slips to 15th in global FDI rankings (UNCTAD)
2024 (est.)	~32.0–33.0 (estimated)	+13% approx.	Early signs of rebound; driven by Make in India, PLI schemes, and new projects

India witnessed record-high FDI inflows in 2020, followed by a slight moderation in subsequent years and a sharp drop in 2023. Official data from the Reserve Bank of India (RBI) show that total FDI inflows (which include equity investments, reinvested earnings, etc.) were US$87.55 billion in calendar year 2020, an all-time high for India. This surge in 2020 was in part due to major investments in India’s digital and retail sectors (for example, sizable stakes purchased in Reliance’s Jio Platforms by global tech giants).

By 2021, FDI inflows had cooled off slightly to US$74.0 billion, which was about 15% lower than 2020’s level. The drop in 2021 can be attributed to the base effect of 2020’s big-ticket deals not repeating, as well as the second wave of COVID-19 in India causing some economic disruption.

In 2022, FDI inflows remained robust but did not reach the 2020 peak. India attracted roughly US$48–49 billion in FDI in 2022. (UNCTAD’s records show about $49.4 billion of FDI for 2022 in India, which kept India among the world’s top 10 FDI destinations.) This level was healthy, reflecting confidence in India’s market size and reforms, although growth was modest. The global context in 2022 included a strong post-pandemic rebound in FDI in some regions, but also emerging headwinds like geopolitical tensions and tightening monetary policy, which likely kept India’s FDI growth in check.

2023 saw a significant downturn in FDI inflows to India. According to UNCTAD, FDI into India fell by 43% in 2023, dropping to about US$28 billion. This was a sharp decline that caused India’s global ranking among FDI recipients to fall from 8th to 15th in 2023. Several factors contributed to this decline: a global slowdown in investment amid economic uncertainty, higher interest rates worldwide (which can make investors more cautious), and specific factors like investors awaiting new policy directions (e.g., India was drafting new trade and investment policies) and high base effects (2021–22 had some large deals that weren’t repeated). It’s worth noting that 2023’s drop was in line with a broader regional trend – developing Asia saw lower FDI that year, and even China experienced a decline in inflows (more on that in the comparative section).

The latest indications for 2024 suggest a rebound in FDI inflows to India. Preliminary data and global reports show that India’s FDI began recovering in 2024, aided by a pipeline of new projects. UNCTAD’s early assessment for 2024 noted that India posted roughly a 13% increase in FDI inflows compared to the previous year. While final full-year figures for 2024 are not yet available at the time of writing, this uptick would put India’s 2024 FDI somewhere in the mid-$30 billion range (if 2023 was ~$28 billion, a 13% rise implies around $32 billion). India’s government also reported a surge in FDI in the first half of FY2024-25 (April–September 2024), indicating renewed investor interest

India’s FPI Inflows (2020–2024)

Foreign Portfolio Investment in India has been far more volatile year-to-year than FDI during 2020–2024. This period saw dramatic swings in FPI – from record outflows during the pandemic panic to record inflows during recoveries and then outflows again when global monetary policy tightened. FPI to India mainly takes the form of Foreign Institutional Investors (FIIs) or Foreign Portfolio Investors (FPIs) buying Indian equities (stocks) and, to a lesser extent, debt securities. These flows are tracked in rupees by agencies like NSDL (National Securities Depository Ltd) and are often reported as net investment (inflow minus outflow).

The onset of COVID-19 in 2020 led to an exodus of portfolio capital from India. In the March 2020 market crash, FPIs pulled out massive funds from Indian equities – for the full calendar year 2020, FPIs were net sellers to the tune of about ₹1.05 lakh crore (Rs 1.05 trillion) from Indian markets (at the time, this was roughly equivalent to an outflow of ~$14 billion.) This was the highest annual FPI net outflow on record for India, reflecting the global risk-aversion and flight to safety during the initial pandemic shock. However, these outflows were largely concentrated in the first quarter of 2020. Once global liquidity flooded back (due to stimulus measures) and India’s markets rebounded, foreign investors returned in late 2020. In fact, if measured by fiscal year, India actually saw a huge FPI inflow in FY2020-21 (April 2020–March 2021) because the post-April recovery brought in funds – over ₹2.74 lakh crore flowed into Indian equities in that fiscal year.

In 2021, FPI inflows were modest and somewhat mixed. During Jan-Dec 2021, foreign investors were net sellers of about ₹10,359 crore in Indian equities, which is a small outflow (~$1.4 billion) indicating essentially a flat year. In fact, for much of 2021, FPIs did put money into Indian stocks (especially in the first half when markets were rallying), but towards the end of 2021 they turned cautious. The anticipation of U.S. Federal Reserve rate hikes and profit-taking after the stock market’s strong run led to FPI outflows in late 2021, canceling out earlier inflows. Thus, 2021 overall saw only a marginal net withdrawal by FPIs.

The situation changed dramatically in 2022. Facing aggressive global monetary tightening (interest rate hikes in the U.S. and elsewhere to combat inflation), foreign investors pulled funds out of emerging markets on a large scale. India experienced a record FPI equity outflow in 2022, with FPIs withdrawing approximately ₹1.21 lakh crore from Indian stocks over the year. This net outflow (~$15–16 billion) was one of the highest ever, reflecting foreign investors rotating out of India and other emerging markets in favor of safer or higher-yielding assets as global interest rates rose. The year 2022 also saw India’s stock market face volatility and relatively high valuations, which may have prompted some foreign fund reallocation. Notably, this heavy selling by FPIs put pressure on India’s stock indices and the rupee during 2022. The RBI and policymakers closely watched these flows, though India’s robust forex reserves provided a buffer. It’s worth mentioning that while equity saw outflows, some funds did flow into Indian debt markets in 2022, but not enough to offset the equity sell-off.

After two years of net selling, FPIs came back strongly in 2023. India’s economy was one of the fastest-growing major economies in 2023, corporate earnings were robust, and relative stability along with optimism about India’s prospects led to a resurgence of foreign portfolio inflows. For calendar year 2023, FPIs net purchased about ₹1.71 lakh crore in Indian equities (net inflow). This is roughly equivalent to an inflow of ~$20+ billion, marking 2023 as one of the best years for FPI into India. In fact, it was a sharp reversal from 2022’s exodus, and one of the highest annual FPI inflows in recent history. Foreign investors were particularly bullish on sectors like financial services, IT, and consumer goods in India during 2023, and India’s weight in emerging market portfolios increased as China’s attractiveness waned for some investors (due to its regulatory and economic concerns in 2023). The ample FPI inflows contributed to new highs in Indian stock market indices during late 2023.

However, the roller-coaster continued into 2024, which saw a significant drop-off in FPI enthusiasm. Through most of 2024, FPIs have been much more cautious. In fact, by the end of 2024, the net FPI flow for the year was barely positive – essentially flat. Data indicates that for the full year 2024, FPIs were roughly net zero in Indian equities (one estimate puts net inflow at just about ₹427 crore, which is negligible). This stagnation was due to multiple factors: global uncertainties (war and geopolitical tensions), concerns over high stock valuations in India, and foreign investors reallocating funds due to rising bond yields in developed markets (which make equity investments relatively less attractive). There were bouts of both inflows and outflows during 2024 – for instance, some inflows in the middle of the year when Indian markets dipped (FPIs bought the dip), but outflows towards year-end amid global risk-off sentiment. By and large, 2024 did not see the sustained foreign buying that 2023 did.

In summary, India’s FPI trend from 2020–2024 has been highly volatile, as shown in the table below:

Comparative Analysis: India vs. Other Emerging Economies (China & Vietnam)

To put India’s FDI and FPI trends in context, it’s useful to compare with other emerging economies. Here we look at China and Vietnam – two Asian economies at different stages of development that have also been attracting foreign investments. Each offers a different story: China as the manufacturing giant and one of the world’s top FDI destinations (with a relatively closed capital account for portfolio flows) and Vietnam as a rapidly rising FDI magnet in Southeast Asia. We’ll examine their recent FDI/FPI trends (especially 2020–2024) and the key factors influencing those trends, then see how India stacks up.

China: High FDI Inflows, Managed Portfolio Flows

China has been one of the largest recipients of FDI globally for decades, thanks to its massive market and role as the world’s manufacturing hub. In the last five years, China’s FDI inflows have remained very high in absolute terms, though the trend has shown some fluctuations and a recent decline. According to China’s Ministry of Commerce and UNCTAD data, China’s FDI inflows were about $163 billion in 2023, which was a 13.7% decline from 2022 (when inflows were roughly $189 billion). In fact, 2022 marked a peak in recent years for China – FDI was growing (about +4.5% that year) and reached around $180–190 billion. By 2023, however, inflows fell, reflecting challenges in China’s economic environment. Factors such as an uneven post-COVID economic recovery, rising labor costs, U.S.–China trade tensions, and regulatory crackdowns in certain sectors (like technology and education in 2021) dampened foreign investor sentiment. Notably, China’s zero-COVID policies in 2020–2022 and later property sector troubles also made some investors more cautious. Despite the dip, China in 2023 still accounted for a significant share (over 12%) of global FDI flows and remains the second-largest FDI host in the world (after the United States).

FDI Inflows in China: 2020 to 2024
Year	FDI Inflows (USD Billion)	% Change YoY	Key Highlights
2020	144.4	+5.7%	Strong performance during global downturn; China seen as stable manufacturing base
2021	173.5	+20.2%	Surge due to post-COVID rebound and high-tech sector inflows
2022	189.1	+9%	Record high; tech, green energy, and services attracted investors
2023	163.0	-13.7%	Decline due to slowing economy, regulatory headwinds, and global uncertainty
2024	~115.0 (UNCTAD early estimate)	-29% approx.	Continued decline amid weak recovery, geopolitical shifts, and investor caution

China’s FDI profile is heavily skewed towards manufacturing and high-tech services. The government has been actively encouraging FDI in advanced industries and has opened up many sectors over the years. For example, restrictions on automotive sector FDI were eased and financial sector ownership rules relaxed. However, regulatory unpredictability (such as sudden anti-monopoly actions or data security laws) has introduced some uncertainty for foreign companies recently. Still, companies from around Asia (Japan, South Korea, Singapore) and the West continue to invest in China’s supply chains and consumer market, given its sheer scale.

Key factors influencing China’s investment trends: A stable macro environment and strong infrastructure have historically drawn FDI into China. In recent years, rising wages and the U.S.–China trade war have prompted some foreign firms to reconsider new investments or to adopt a “China+1” strategy (diversifying production to other countries alongside China). China’s huge domestic market (1.4 billion consumers) still lures market-seeking FDI, and its deep supply chain networks are unparalleled.

In contrast to FDI, China’s foreign portfolio investment flows are tightly regulated. China maintains capital controls that limit foreign investment in domestic stocks and bonds. Programs like the Stock Connect and Bond Connect (linking Hong Kong and mainland exchanges) and index inclusions (e.g., Chinese A-shares in MSCI indices, Chinese bonds in global bond indices) have gradually increased foreign portfolio participation. Even so, foreign holdings of Chinese equities and bonds are a small fraction of the market. Overall, FPI is not a major part of China’s external financing (relative to its huge FDI and trade surpluses).

Vietnam: Rising Star for FDI, Limited FPI

Vietnam has emerged as one of Asia’s brightest FDI success stories in recent years. Despite being a much smaller economy than China or India, Vietnam consistently attracts substantial FDI relative to its size, and the trend from 2020 to 2024 has been strongly upward. In 2020 and 2021, Vietnam’s FDI inflows were around the mid-teens of billions (roughly $15–16 billion annually) – notable given the pandemic. By 2022, FDI into Vietnam had picked up to $17.9 billion (up 14% from the prior year), surpassing pre-pandemic levels. Impressively, 2023 saw a further surge: according to Vietnam’s General Statistics Office, the country attracted about $36.6 billion in foreign investment in 2023, a 32% year-on-year increase. This figure likely includes newly registered capital and expansion of existing projects (it may not all be realized in one year), but it underscores a major jump in investor commitments.

FDI Inflows in Vietnam: 2020 to 2024
Year	FDI Inflows (USD Billion)	% Change YoY	Key Highlights
2020	15.8	-2%	Slight dip; resilient despite pandemic, stable policies helped
2021	17.6	+11.4%	Recovery phase; driven by electronics, garments, and energy
2022	19.7	+11.9%	Strong growth; manufacturing remained top FDI sector
2023	36.6 (registered) / ~23.2 (disbursed)	+17% (disbursed)	Record high commitments; Vietnam seen as China+1 hub
2024	Data awaited	TBD	Expected to remain strong with further diversification of supply chains

Much of this investment is concentrated in manufacturing – in 2023, processing and manufacturing accounted for $23.5 billion, about 64% of total FDI capital, up nearly 40% from the previous year. Key investors in Vietnam include companies from Singapore, South Korea, Japan, and China, often investing in electronics, apparel, machinery, and increasingly high-tech manufacturing. For example, global electronics giants have built factories in Vietnam (e.g., Samsung produces a large share of its smartphones there), and the country is becoming a regional supply chain hub.

Vietnam’s FDI boom is driven by several favorable factors. It has a stable pro-investment policy regime, including multiple free trade agreements (such as the CPTPP and an FTA with the EU) that make it an export platform. The government offers tax incentives and has improved ease of doing business. Vietnam’s young and relatively low-cost labor force is attractive to manufacturers. Crucially, the “China+1” strategy adopted by many firms – to diversify production away from over-reliance on China – has benefitted Vietnam perhaps more than any other country. Since the U.S.–China trade war and through the pandemic, companies have accelerated investments in Vietnam to hedge geopolitical risk.

On the FPI side, Vietnam’s capital markets are still considered “frontier” and are smaller in scale. There is foreign portfolio interest (especially in equities on Vietnam’s Ho Chi Minh City stock exchange), but it is limited by market size and foreign ownership caps in certain sectors. FPIs did pump money into Vietnam’s stock market in the late 2010s when growth was high, but in the last couple of years the trend has been mixed. In 2022, Vietnam’s stock market fell sharply from a bubble-like peak, causing some outflows. The government is aiming for Vietnam to eventually graduate to “emerging market” status in indices, which could attract more FPI. But compared to FDI, portfolio flows are not yet a major driver in Vietnam’s external accounts.

India’s Position in the Global Investment Landscape

India holds an interesting position globally and in Asia. It is often seen as the next big frontier for foreign investment – given its huge domestic market (1.4 billion people), democratic system, and diversified economy, many analysts project India as a potential FDI powerhouse. The data from 2020–2024 shows India attracting very large FDI inflows (tens of billions annually), albeit with some volatility. For most of those years, India was among the top 10 FDI destinations worldwide, even ranking as high as 7th in 2021 by some measures. The sharp drop in 2023 was a setback, but with a rebound in 2024, India is likely to climb in rankings again. To put it in perspective, India’s ~$28 billion FDI in 2023 was dwarfed by China’s $163 billion, but was higher than many other emerging economies received.

On the global stage, investors often compare India and China. While China’s economy is still five times larger and gets more FDI, India is often highlighted as the fastest-growing large economy and a democratic alternative for supply chain diversification. The geopolitical climate has somewhat increased India’s attractiveness: global companies looking to reduce over-reliance on China (due to trade wars or geopolitical rivalry) are considering or actively investing more in India (and other places like Vietnam, Malaysia, etc.).

In UNCTAD’s World Investment Report 2023, India was noted as the third-largest recipient of greenfield project announcements in the world, with over 1,000 projects in 2022 – a forward-looking indicator that actual FDI inflows could grow as those projects materialize. India was also the 2nd largest in international project finance deals in 2022, reflecting infrastructure investments. These statistics show India’s prominence in global investors’ expansion plans.

Conclusion

Both FDI and FPI are crucial for India’s development, but they play different roles. The last five years have shown that FDI in India tends to be resilient and driven by long-term fundamentals, while FPI is highly sensitive to global conditions and can swing dramatically. India’s ability to attract record FDI even amid a pandemic (2020) and then recover from a dip (2023) demonstrates strong underlying investor interest.

Going forward, sustaining high FDI will likely involve continued economic reforms, improving infrastructure, and leveraging trade agreements to make India an export and investment hub. Keeping FPI inflows positive will require macroeconomic discipline and market-friendly policies to make India an attractive destination relative to other emerging markets.

The country’s recent milestone of hitting $1 trillion in cumulative FDI inflows reflects how far it has come. If India can address its bottlenecks and capitalize on the current global trends, it is poised to strengthen its position even further, drawing more FDI for development and benefiting from FPI to deepen its capital markets.