Difference Between FDI and FII: Everything You Must Know About Foreign Investments 

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Foreign investment is an essential source of capital, technology, and growth for India. The most important types of foreign investment are Foreign Direct Investment and Foreign Institutional Investment. But what is the difference between FDI and FII?

Let us find out!

Types of Foreign Investments

There are three types of foreign investments that you must be aware of:

•  Foreign Direct Investment (FDI): This is when a company or an individual from one country invests in a business or a company of another country with the intention of having a long-term interest and control. 

For example, when a Japanese car manufacturer sets up a plant in India, it is FDI.

•  Foreign Portfolio Investment (FPI): This is when large financial institutions from one country invest in the securities and assets of another country, such as stocks, bonds, mutual funds, and derivatives. 

For example, when a US hedge fund buys shares of an Indian company, it is FPI.

•  Foreign Institutional Investment (FII): This is when large financial institutions from one country invest in the securities and assets of another country, such as stocks, mutual funds, and derivatives. 

Read the difference between FPI and FII.

For example, when an Indian retail investor buys a US exchange-traded fund (ETF), it is a foreign indirect investment.

Before we jump in to understand the difference between FDI and FII, let us understand them in detail.

What is FDI?

FDI full form- Foreign Direct Investment. 

FDI is a type of international investment that involves the transfer of capital, technology, management, and know-how from one country to another. 

Foreign Direct Investment (FDI) is when a company or individual from another country invests directly in businesses or assets in India. 

For instance, if a company from the United States builds a factory in India, that’s FDI. It shows a long-term interest in Indian businesses and often comes with control or significant influence over the company.

FDI aims to establish a long-term interest and influence in the foreign entity and often results in the creation of a new business, a merger, an acquisition, or a joint venture.

FDI can be classified into two types: horizontal and vertical. 

  • Horizontal FDI occurs when the investor company invests in the same industry as its domestic operations.

For e.g. when a car manufacturer from one country sets up a plant in another country.

  •  Vertical FDI occurs when the investor company invests in a different stage of the production process of its domestic operations. 

For e.g. when a car manufacturer from one country sources raw materials or components from another country.

What is FII?

FII full form- Foreign Institutional Investment.

FII is a type of portfolio investment that involves the purchase and sale of securities and assets, such as stocks, mutual funds, and derivatives, in a foreign country. 

Foreign Institutional Investment (FII) is when investors from other countries put their money into assets like stocks and bonds in India’s financial markets. 

FII does not aim to establish a lasting interest or control in the foreign entity and is usually short-term and speculative in nature.

FII can be classified into two types: debt and equity. 

  • Debt FII occurs when foreign institutional investors invest in the debt securities of the host country, such as government bonds, corporate bonds, and commercial papers. 
  • Equity FII occurs when foreign institutional investors invest in the equity securities of the host country, such as shares, stocks, and mutual funds.

Now, what is the basic difference between FDI and FII?

FDI vs FII: Exploring the Difference Between FDI and FII

Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII) are two types of foreign investment that differ in multiple ways.

FDI vs FII: Know the Key Differences

FDI vs FII: Know the Key Differences
FDI vs FII: Know the Key Differences
BasisFDIFII
Nature of InterestLong-termShort-term
ControlYesNo
Impact on EconomySignificantLimited
Regulations & BarriersMore stringentLess restrictive
Risk & Return PotentialHigherLower

Difference Between FDI and FII

The main difference between FDI and FII includes multiple aspects:

•  FDI implicates a direct investment in a company with the purpose of acquiring management control or influence.

On the flip side, FII involves investment in securities/ assets of a foreign company.

•  FDI results in a long-term interest in the investee company.

FII investment is short-term and focused on the secondary market.

•  FDI brings capital, technology, management, and know-how to the host country.

FII brings in only capital.

•  FDI contributes to the economic growth and development of the host country.

FII has a limited impact on the real economy.

•  FDI faces more entry and exit barriers and regulations, while FII faces fewer restrictions and is more flexible.

•  FDI has a higher risk and return potential.

FII has a lower risk and return potential.

FDI vs FII: Benefits of Foreign Investments in India

FDI and FII are both important sources of foreign investment for India.

Some of the benefits of FDI and FII for India are:

• FDI helps create long-term and stable linkages between Indian and foreign firms. This leads to the transfer of technology, skills, and management practices. FDI also boosts the productivity and competitiveness of the domestic industry.

• FII enhances the liquidity and efficiency of the Indian capital market. It provides more funds and diversification opportunities for investors. FII also reflects the confidence and attractiveness of the Indian economy in the global scenario.

• Both FDI and FII contribute to the economic growth and development of India. They increase the GDP, employment, exports, and tax revenues. They also help in financing the current account deficit and building the foreign exchange reserves.

• Both FDI and FII foster innovation and entrepreneurship in India. They support the creation and expansion of new ventures, especially in emerging sectors. Some of the common ones are IT, biotechnology, renewable energy, etc.

• Both FDI and FII promote India’s integration and cooperation with the global economy. They facilitate the exchange of ideas, knowledge, and best practices.

Conclusion

FDI and FII are two different types of foreign investment that have different implications for India. FDI is more long-term and strategic, while FII is more short-term and speculative. FDI brings more benefits to the real economy, while FII benefits the financial markets. Both FDI and FII are essential for India’s economic growth and development, as they provide capital, technology, innovation, and integration. 

FAQs | Difference Between FDI and FII

What is the difference between FPI and FII?

Foreign Portfolio Investment (FPI) involves trading securities and assets of a foreign country, like stocks or bonds. Foreign Institutional Investment (FII) is specifically conducted by large financial institutions such as mutual funds or pension funds.

What is the difference between FDI and FPI?

FDI means investing in a business/ company of a foreign country with the intention of having a long-term interest. FPI means investing in securities or assets of a foreign country with a short-term perspective.

What is the role of FDI and FII in the Indian economy?

FDI can bring in technology, management, and know-how and contribute to the economic growth and development of India. FII can provide liquidity, market efficiency, and valuation to the Indian financial market.

What is the difference between investment and FDI?

Investment is a general term that means putting money or resources into something with the expectation of a return. FDI is a specific type of investment that means investing in a business or a company of a foreign country for a long-term interest.

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Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.