Foreign Direct and Portfolio Investment in the Contemporary Globalized World Should They Be Still Treated Separately

Abstract

Foreign direct investment (FDI) and foreign portfolio investment (FPI) have
been long considered as independent forms of international capital flows. This
paper analyzes the mutual relationship between FDI and FPI and attempts to
answer the question whether they complement or substitute for each other from
a foreign investor’s point of view. The paper describes the main characteristics
of FDI and FPI in terms of their volatility and profitability. We analyze the
long-run and short-run relationships between FDI and FPI using vector error
correction (VEC) regressions on data for Poland as it is the largest country
in Central and Eastern Europe and receives the lion’s share of these two
forms of capital in the region. Our investigation suggests that FDI and FPI
may be regarded as substitutes. In economically stable periods FDI tends to
dominate over FPI but during insecurity and economic distress FPI starts to
gain importance.