Difference Between FDI and FII

FDI vs FII
 

FDI (Foreign Direct Investments) and FII (Foreign Institutional Investments) both relate to foreign investments made by an entity based in another country. FDI and FII are both quite similar in that they both result in a substantial inflow of funds into a foreign country, and generally result in higher development and growth. Despite their similarities, there are a number of differences between FDI and FII; FDIs are generally more complex, and require more funds and commitment than a FII. The article clearly explains the two terms and points out their similarities and differences.

Foreign Direct Investment (FDI)

FDI (Foreign Direct Investment) as its name suggests refers to an overseas investment made by an entity based in one country. An FDI can be set up through a number of ways, such as through a subsidiary, joint venture, merger, acquisition, or through a foreign associate partnership. FDI should not be confused with indirect investments such as when a foreign entity invests funds in another country’s stock market. A foreign entity that enters into a FDI will have a substantial amount of control over the company or operations into which the investment is made.

Any economy will try to attract more FDI into their country as it results in more jobs, production, create higher demand for local products/raw materials/services, and can result in overall economic growth. Countries that have open economics and with lower regulations will be the most attractive locations for FDI. An example of a FDI would be, a Chinese car manufacturer setting up manufacturing operations in the United States through acquiring a local car manufacturer.

Foreign Institutional Investment (FII)

Foreign Institutional Investments (FII) are made by individuals or investment groups and funds that are registered in one country are invested in another. Examples of such investors include; wealthy individuals, mutual funds, pension funds, hedge funds, and large insurance corporations. In order for an entity to make a foreign investment, they must be legally permitted to make such investments in a country other than its country of establishment.

Foreign institutional investors can invest in secondary markets and can invest in shares, debentures, government securities, commercial papers, etc. FIIs are important to an economy since they provide a number of benefits; they serve as an easy method to obtain extra funding for local corporations, improves a country’s foreign exchange reserves by bringing in more foreign currency, results in more investment and capital that leads to better development and growth of local corporations

What is the difference between FDI and FII?

FDIs and FIIs are both related to foreign investment. They both result in international transfer of funds, which in turn result in better economic integration and development. FDIs are more complex in that they result in a foreign entity setting up operations through a subsidiary, merger, acquisition, etc. FDIs involve a large commitment, larger amount in funding, and cannot enter or leave the market as they please. FIIs, on the other hand, invest in securities and stocks and can withdraw/enter the market at any point given that they have completed the required criteria. Furthermore, a FDI result in the transfer of capital, resources, technology, knowledge, expertise and human capital, whereas FII generally transfers funds only. Both FDI (Foreign Direct Investments) and FII (Foreign Institutional Investments) relate to foreign investments made by an entity based in another country.

Summary:

• Foreign Direct Investment (FDI) refers to an overseas investment made by an entity based in one country. A FDI can be set up through a number of ways, such as though a subsidiary, joint venture, merger, acquisition, or through a foreign associate partnership.

• Foreign Institutional Investments (FII) are made by individuals or investment groups and funds that are registered in one country but invest in another through purchasing foreign shares, securities, etc.

• FDI involves a large commitment, larger amount in funding, and cannot enter or leave the market as they please, whereas FII invests in securities and stocks and can withdraw/enter the market at any point given that they have completed the required criteria.

• FDI result in the transfer of capital, resources, technology, knowledge, expertise and human capital, whereas FII generally transfers funds only.