The inflow of foreign investment into the country improves the country’s balance of payments position, while the outflow in the form of imports, dividend payments, royalties, etc. results in a deficit in the balance of payments. The main difference between FDI and FII is that FDI refers to an investment of foreign investment in domestic markets or organizations. While FII refers to a foreign institution that makes investments in domestic securities.
Foreign Direct Investment or simple FDI refers to an investment of foreign investment in national markets or organizations. However, it does not include foreign investment in domestic stock markets. It is considered more useful to a country than investment made by domestic companies in the country because equity investments are potentially ‘hot money‘ that can disappear at the first sign of trouble, while FDI is durable and more useful, either that things go well or badly. The importance of FDI includes: financial transfer in forex, production technology, management skills, physical resources such as machinery, equipment, tools, etc. institutional system, information and database, global contacts, research and development, training resources and commercial channels. FDI is different from foreign portfolio investment (PFI) which means investment in securities of another country in the form of stocks and bonds. The origin of the investment does not influence the definition of FDI, that is, the investment can be made “inorganically” by buying a company in the target country or “organically” by expanding the operations of an existing company in that country.FII
Foreign Institutional Investor or simply FII refers to a foreign institution that makes investment in domestic securities. For making investment in domestic securities, FII is required to be registered with the domestic Securities and Exchange Commission/Board are allowed to subscribe to new securities or trade in already issued securities. An institutional investor can have some influence in management of corporations as it will be entitles to exercise the voting rights in a company. Through this it can actively engage in corporate governance. Moreover, institutional investors have the freedom to buy and sell shares, they can act a large part in which companies stay solvent, and which go under. The advantages of FII is that it enhances flows of equity capital, improved capital market, manages uncertainty and controls risks,
- According to the rule of many countries, where an investor has a share of 10% or less in a company, it will be treated as FII and if it is more than 10%, it will be treated as FDI.
- The difference between FDI and FII lies more in the registration or approval process and, to some extent, in the individual investment limits or lock-in conditions specified for each category.
- FDI is a long-term investment, while FII is typically a short-term investment.
- FDI is an investment in physical assets, while FII is an investment in financial assets.
- FDI flows into the primary market while FII flows into the secondary market.
- The FDI has a share in the profits of the company, while the FII is eligible for capital gains.
- FDI has a direct impact on labor employment and wages, while FII does not.