(FDI) Foreign direct Investment & (FII) Foreign Institutional Investors : (Back to school)

Foreign direct investment is an investment of assets done by foreign origin company into the domestic equipments, organization, and company. (FDI)

An investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds. (FII)

Lets try to understand the differences between them :

Sr. no. FDI FII
1  Defined as investment made by a non-resident in equity of domestic company with intension of participating in the management company. FII can be defined as investment made by a Non-resident in equity of domestic company without intension of acquiring management control.
2 Generally associate with new technology, funding mechanism , new markets or new process. FII dosn’t involve any mgt related interaction between the investor and the target company.
3  FDI normally expected to be long-term involvement in the target company. FII is normally expected to be short-term investment.
4 Intension of the investment is to achieve long-term growth. Intension is to make quick capital gains.
5 FDI generally takes place through private placement of new shares or direct purchase from existing promoters. FII generally takes place through secondary market operations and there is no direct relationship between the investor and the company.
6 FDI results in economic growth and employment and therefore is desired by all governments. FII basically substitutes domestic investment with foreign investment and although it helps to increase the available capital in the economy there is no direct relation with economic growth.
7 Withdrawl or exit of FDI is difficult and time consuming. Due to easy exit possibility FII results in ‘HOT money” situation such funds destabilise the domestic market and exchange rates there by resulting in losses for genuine domestic operators. Due to this effect most countries restrict the inflow of such funds through exchange control regulations.
8 FDI involves an increase in resources of the company which has direct impact on its Balance sheet. It may or may not impact the market price. FII does not have any connection with resources available to company and therefore has no effect on balance sheet. But due to transactions undertaken in secondary market it has immediate impact in the market price of the company.

2 thoughts on “(FDI) Foreign direct Investment & (FII) Foreign Institutional Investors : (Back to school)

  1. Hi Sandeep
    Good post. very useful, short and brief and to the point.I really wonder how there is an international norm of defining FDI as ” an investment having more than 10% stake in a company( equity)” and FII as “having less than 10% stake in a company” which also Chidambaram proposed in this budget but DIPP opposed such an arbitrary distinction for reasons you put( e.g. there should be other qualitative/quantitative parameters in distinguishing these two, say FDI has management control and long-term interest difficult to withdraw ) …… it would be good if you also discusses ‘greenfield’ and ‘brownfield’ FDI a bit….but it’s fine… and if i am not wrong in the 4th point, should it be ‘intention’ instead of ‘intension’? many thanks for posting such useful article.


    1. Thanks Sankhanath, will come back on this as haven’t updated self with the kind of Bureaucracy going on in this country.


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