Last updated on by Surbhi S
Foreign Direct Investment (FDI) is defined as the type of investment into production or business in a country, by an enterprise based in another country. It is often contrasted with Foreign Institutional Investment (FII), which is an investment fund, based in the country, other than the country, in which investment is made.
Both are the forms of investment made in a foreign country. FDI is made to acquire controlling ownership in an enterprise but FII tends to invest in the foreign financial market. In most cases, the former is given preference over the latter because it benefits the whole economy.
There are stark differences between FDI and FII which have been presented in this article excerpt.
Content: FDI Vs FII
- Comparison Chart
- Definition
- Key Differences
- Conclusion
Comparison Chart
| Basis for Comparison | FDI | FII |
|---|---|---|
| Meaning | When a company situated in one country makes an investment in a company situated abroad, it is known as FDI. | FII is when foreign companies make investments in the stock market of a country. |
| Entry and Exit | Difficult | Easy |
| What it brings? | Long term capital | Long/Short term capital |
| Transfer of | Funds, resources, technology, strategies, know-how etc. | Funds only. |
| Economic Growth | Yes | No |
| Consequences | Increase in country's Gross Domestic Product (GDP). | Increase in capital of the country. |
| Target | Specific Company | No such target, investment flows into the financial market. |
| Control over a company | Yes | No |
Definition of FDI
Foreign Direct Investment shortly known as FDI refers to the investment in which foreign funds are brought into a company based in a differentcountry from the investor company’s country. In general, the investment is made to gain a long lasting interest in the investee enterprise. It is termed as a direct investment because the investor company looks for a substantial amount of management control or influence over the foreign company.
FDI is the considered as one of the primary means of acquiring external assistance. The countries where the availability of finance is quite low can get finance from developed countries having the good financial condition. There are a number of ways through which a foreign investor can get controllingownership like by way of merger or acquisition, by purchasing shares, by participating in a joint venture or by incorporating a wholly owned subsidiary.
Definition of FII
FII is an abbreviation used for Foreign Institutional Investor, are the investors that pool their money to invest in the assets of the country situated abroad. It is a tool for making quick money for the investors. Institutional investors are companies that invest money in the financial markets in thecountry based outside the investor country. It needs to get itself registered with the securities exchange board of the respective country for making the investment. It includes banks, mutual funds, insurance companies, hedge funds, etc.
FII plays a very crucial role in any country’s economy. Market trend moves upward when any foreign company invests or buys securities, and similarly,it goes down if it withdraws the investment made by it.
Key Differences Between FDI and FII
The significant differences between FDI and FII are explained below:
- Foreign Direct Investment or FDI is defined as the investment made by a company in the company situated outside the country. Foreign InstitutionalInvestor or FII is when investors, most commonly in the form of institutions that invest in the country’s financial market.
- FII is a way to to make quick money, the entry and exit to the stock market are very easy. On the other hand, the entry and exit are not easy in FDI.
- FDI brings long-term capital in the investee company whereas FII may bring long or short term capital in the country.
- In the case of FDI, there is the transfer of funds, resources, technology, strategies, know-how. Conversely, FII involves the transfer of funds only.
- FDI increases job opportunities, infrastructural development in the investee country and thus leads to economic growth, which is not in the case of FII.
- FDI results in the increase in the country’s productivity. As opposed to FII that results in the increase in the country’s capital.
- FDI targets a particular company, but FII does not target a particular company.
- FDI obtains management control in the company. However, FII does not enable such control.
Conclusion
After the above discussion, it is quite clear that the two forms of foreign investment are completely different. Both have its positive and negative aspects. However, foreign investment in the form of FDI is considered better than FII because it does not just bring capital but also amounts to better management, governance, transfer of technology and creates employment opportunities.
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Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII) are two pivotal aspects of international finance. FDI involves a company from one country investing in a business or enterprise located in another country, often seeking significant control or influence. This type of investment typically brings in long-term capital and involves various assets, resources, technology, and knowledge transfer.
On the other hand, FII refers to investments made by foreign institutions or entities in a country's financial markets. FII is more liquid and allows for easy entry and exit compared to FDI. It's a tool for quick financial gains and involves the transfer of funds without the same level of involvement in the company's management or control.
FDI tends to lead to economic growth by enhancing productivity, creating job opportunities, and fostering infrastructural development in the invested country. This contrasts with FII, which primarily impacts a country's capital without directly influencing its economic growth or job creation.
The differences are stark: FDI aims for specific companies, brings long-term benefits, involves various resource transfers, and grants management control, whereas FII is more about short-term capital, easy market entry/exit, and doesn't target particular companies or enable management control.
In essence, FDI is often preferred due to its long-term benefits beyond just capital injection, such as technology transfer, improved governance, and job creation. This preference stems from its substantial impact on economic development compared to FII.
Regarding the concepts mentioned in the article, here's a brief explanation:
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Difference Between FDI and FPI: Foreign Portfolio Investment (FPI) involves investments in financial assets like stocks and bonds without obtaining a significant degree of control over the invested entities, contrasting with FDI's focus on ownership and control.
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Stocks vs. Mutual Funds: Stocks represent ownership in a single company, while mutual funds pool investments from various individuals to invest in multiple assets or stocks.
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ADR vs. GDR: American Depositary Receipts (ADR) and Global Depositary Receipts (GDR) are financial instruments enabling investment in foreign companies' stocks, with ADRs being listed in U.S. markets and GDRs listed globally.
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Foreign Trade vs. Foreign Investment: Foreign trade involves the exchange of goods and services between countries, while foreign investment involves investing capital or resources in a foreign country for ownership or financial returns.
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Hedge Funds vs. Mutual Funds: Hedge funds are more flexible investment pools that aim to generate high returns for investors, often using aggressive strategies, unlike mutual funds, which are typically less aggressive and cater to a broader investor base.
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Mutual Funds vs. ETFs: Mutual funds and Exchange-Traded Funds (ETFs) are investment vehicles, but ETFs trade on stock exchanges like individual stocks, while mutual funds are bought and sold at their Net Asset Value (NAV) at the end of the trading day.
Understanding these distinctions can greatly aid in making informed decisions in international finance and investment strategies.
