Inflow of foreign investment in the country improves the balance of payment position of the country while outflow in form of imports, dividend payments, royalty, etc. results in deficit in balance of payment. The main difference between FDI and FII is that FDI refers to an investment of foreign investment into domestic markets or organizations. While FII refer to a foreign institution that makes investment in domestic securities.
Foreign Direct Investment or simple FDI refers to an investment of foreign investment into domestic markets or organizations. However, it doesn’t include the foreign investment into domestic stock markets. It is considered as more useful for a country than investment made by domestic companies in the country because equity investments are potentially ‘hot money’ that can leave at the first sign of trouble while FDI is durable and more useful whether things go well or badly. The significance of FDI includes: financial transfer in forex, production technology, management skills, physical resources like machinery tools equipment, etc. institutional system, information & database, worldwide contacts, research & development, training resources, and trade channels. FDI is different from portfolio foreign investment (PFI) that stands for investment in securities of another country in shape of stocks and bonds. The origin of the investment doesn’t impact the definition as an FDI, i.e., the investment may be made either ‘inorganically’ by buying a company in the target country or ‘organically’ by expanding operations of an existing business in that country.
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, helps in financial innovation, improves corporate governance, development of hedging instruments, etc.
- According to rule of many countries, where an investor has a stake 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 rather lies 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 normally 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 in the secondary market.
- FDI ha share in the profits of the company while FII is eligible for capital gain.
- FDI has direct impact on employment of labor and wages while FII doesn’t.