Table of content

Difference between FDI and FII

Table of content

Difference Between FDI and FII

The term "foreign direct investment" (FDI) refers to investment made by a company with its headquarters in another country. It is frequently confused with Foreign Institutional Investment (FII), which is investments made by a company with its headquarters in a nation different from the one where the investment is being made.

Both FDI and FII are types of investments that are made abroad. FDI is designed to acquire a majority stake in a company or sector, whereas FII prefers to invest in international financial markets because it benefits the entire economy.

What is the Meaning of FDI?

The investment in which foreign money is transferred into a company based in a country apart from the investor company's home country is referred to as foreign direct investment. The goal of FDI is to develop a long-term interest in the investee company. Since the investor corporation seeks a sizable degree of influence over the foreign company, it is referred to as a direct investment.

One of the main ways to get overseas investment is through foreign direct investment. Industrialised countries with sound financial standing can provide financing to the nations with scarce financial resources. A foreign investor can acquire controlling ownership in a company in a number of methods, including through mergers and acquisitions, joint venture participation, stock purchases, and the incorporation of wholly owned subsidiaries.

Features of FDI

  • Long-term Investment:

    The FDI involves a large sum of money invested into a business for a long period. It is like being dedicated to the growth of that enterprise over many years.
  • Economic Development:

    Foreign companies investing in other countries can foster economic growth in those nations. This means more jobs, increased production and higher income levels as more investments are made leading to improved living standards for all.
  • Sharing Knowledge and Skills:

    Besides capital infusion, FDI also brings in new information or expertise. People from different parts of the world may teach locals new things, introduce better technology or show them how to run their businesses efficiently.
  • Joint Decision Making:

    Because these investors have put their resources into such firms, they tend to take part in key decisions about them too. Sometimes even important decisions could be made by them due to high investment values.

What is the Meaning of FII?

The term "foreign institutional investor," or "FII," refers to investors who pool their funds to buy national assets located abroad. Overseas companies that invest money in the local financial markets are known as institutional investors. In order to make the investment, it must register with the relevant country's securities exchange board. Mutual funds, banks, hedge funds, insurance providers etc. are all considered as FIIs. Any nation's economy greatly benefits from FII. When a foreign business invests in or purchases securities, the market trend swings up, and vice versa if the investment is withdrawn.

Features of FII

  • Short-term Investment:

    FII is like a quick visit to the stock market rather than a long-term stay. Investors usually buy and sell securities based on how the market sentiments are placed at the moment.
  • Economic Impact:

    When foreign institutional investors enter into a country, it acts as an adrenaline rush which boosts financial markets within that nation. This affects negatively when they sell their stakes in a company.
  • Volatility Manifestation:

    FII is like riding on a rollercoaster because of the big volumes involved. The prices can change rapidly either upwards or downwards giving jerks to an otherwise smooth-running economy.
  • Non-Participation in Decisions-Making:

    The FIIs do not get to make any decisions in the companies they invest in. It is more like going to a restaurant where you cannot choose your meal.

What are the Differences between FDI and FII?

Let's go over the fundamental differences between FDI and FII.

Particulars FDI FII
Meaning Any corporation or organisation based and incorporated abroad that makes an investment in an Indian enterprise is known as FDI. Foreign investor’s investment in the Indian stock market is known as FIIs.
Tenure of Investment FDI investments are often made for the long term. FII investments are short-term in nature.
Targeted Investment FDI investment targets a specific company. FII investment does not target a specific company.
Benefits for the investee company In addition to financial inflow, the investee company gains several advantages in the form of technical know-how, strategic insights etc. The investee firm obtains simply the capital through a FII investment and none of the additional perks that come with an FDI investment.
Ease of Investment When an investment is made through the FDI route, it becomes difficult for investors to enter and exit the market. When an investment is made through FII, investors can quickly enter and exit the market.
Impact of Investment Due to the fact that FDI investments boost the nation's GDP, they are advantageous to the entire nation. The capital of the nation's businesses increases as a result of FII investment.
Transfer of control or influence The investee company transfers control or influence as a result of FDI investment. The investors have no power or influence over FII investments.

It is evident from the discussion above that the two types of foreign investment are entirely distinct. Both have their advantages and disadvantages. However, foreign investment in the form of FDI, is regarded as superior to FII because it not only brings capital but also improves management, governance, technology transfer, and employment opportunities.

How to Choose Between FDI and FII?

Now that you know the difference between FDI and FII, let’s look at how you can choose between the two as a vehicle for your investment decision. The following factors will help you make the right choice.

  • Investment Approach:

    If there are long-term goals involved with investing in a particular company, you can follow the FDI as it matches your investment style. However, if all that matters most is catching waves, then following FII could be more appropriate. They focus on short-term investments that may be influenced by the ups and downs of the market.
  • Profit Goals:

    Consider how you want to make your money. If you're looking for a slice of the company's profits and dividends, FDI offers that direct ownership. However, if you're more interested in buying low and selling high to make gains from market movements, FII could be a better bet for you.
  • Risk Aversion:

    If you like things stable, going for FDI will suit you best since it provides greater control over your investments as opposed to FIIs where rapid fluctuations can occur depending upon prevailing conditions, thus making it more volatile.
  • Investment Span:

    Another factor would be the duration for which you want your funds locked up. Therefore, if you have the intention of keeping money tied up for many years, then FDI is most appropriate. But in case you are thinking about a few months or a couple of years, you should choose FIIs instead.

Frequently Asked Questions

For a country, FDI is more beneficial than FII because it is long-term in nature and promotes technology sharing, job creation as well as economic growth. On the other hand, FII, being short-term and unpredictable, can cause speculative bubbles and does not foster sustainable development that much. FDI helps strengthen local economies with direct involvement.

Yes. When FII buys substantial shares (normally 10% or above) of a company, this act shows long-term interest in its operations rather than quick profits from capital gains. Therefore, such an investment level is regarded as FDI as it indicates strategic involvement with management and decision-making processes.

Some major risks associated with FDIs and FIIs include operational difficulties, market volatility, investor sentiment, sudden withdrawal of capital flows, political instability within host countries, regulatory shifts resulting from government policy adjustments towards attracting foreign businesses, etc.

Generally speaking, among FDI and FII, the former tends to be relatively more stable than the latter. This is because FDIs require heavy long-term commitments coupled with strategic investments aimed at productive capacity enhancement through technology transfers. This in return creates jobs and fosters sustainable economic growth.

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