Difference Between FDI and FII: Economic fallout of the COVID-19 pandemic has made the valuation of Indian businesses attractive. In the past, India fell behind in comparison to China in terms of capital raised.

However, the current pattern of economic shift and government policies continue to support India to become a favourable market for the investment of foreign capital.

India requires foreign inflows as such inflows act as a critical trigger for overall economic growth for any developing nation like India.

Foreign companies tend to make investments in India and take advantage of relatively lower wages and achieve technical know-how. These measures support the nation in generating employment for its population.

Indian government’s favourable policy structure and strong business environment help in continuing the flow of foreign capital into the country.

The government took several initiatives in recent years including the relaxation of FDI norms across sectors like defence, PSU oil refineries, telecom, power exchanges, stock exchanges, etc.

Market size, rationalization of policies, strong demographics, healthy economic growth, etc. are some of the important factors which help India in getting foreign investment.

Whenever foreign capital flows in, it benefits India and that particular sector to a large extent. When foreign investors invest their capital into India, it tends to benefit stock markets in India as it exhibits confidence.

When we speak of foreign inflows, it can be principally done in two ways: By foreign direct investment and by Foreign institutional investors.

In this article, we will explain the difference between FDI and FII and how such investments support the Indian economy. Read on to find out more about foreign inflows.

Foreign Direct Investment And Foreign Institutional Investment

  • Foreign direct investment is an investment in the form of controlling ownership in a business in one country by an entity based in another country. This type of investment goes into production or business in a country, by the company based out in another country. 
  • Foreign Institutional Investor or FII refers to an investor or group of investors who gather their capital to purchase national assets which are located in overseas locations. To be precise, it is referred to as a tool for investors to quickly make money by buying and selling securities in the secondary market. Some examples of FIIs include banks, mutual fund houses, infrastructure companies, etc. A first-hand difference that you can notice here is ownership. The investment made by FDI also comes with the ownership aspect. 
  • The difference between FDI and FII can also be explained by focusing on the tenure of investment. More often than not, FDI investment is long-term. However, FIIs invest in the stock market for short-term only as the focus here is to sell the holdings in profits. 
  • Both FDI and FII are the types of investments made in a foreign country. FDI means acquiring a controlling stake in an enterprise and FII plans to invest in a foreign financial market. FDI investments are preferred over FII as it benefits the whole economy.
  • While FIIs can easily enter and exit their investments, FDI investments are quite difficult. FDI investments are more controlled and might require government approvals. As a result, such investments are difficult to enter or exit. Due to ease, FIIs can make a significant amount of money in a short period of time.
  • Another point of difference between FDI and FII is the types of transactions involved. In the case of FII, there is only a transfer of funds. On the contrary, FDI investments do more than just transfer money. When FDI investment takes place, an offshore company that invests in another country moves its resources, technologies, equipment, skills, strategies, etc.
  • At the time of FDI investments, the focus is on obtaining the investee company’s management control. On the other hand, in the case of FIIs, there is no particular target as the idea is to make quick money by investing funds. Most of the time, an offshore institutional investor doesn’t want to exert any control over the investee company.

Foreign Flows Help In Overall Economic Development

Any sort of foreign inflows, irrespective of FDI or FII, help in the development of the economy in the long run. It is a sign of economic growth as this means that foreign investors prefer to invest some funds into the investee country.

In 1991, foreign investment was introduced under Foreign Exchange Management Act (FEMA) in India. Experts believed that this step was of utmost importance to add some source of capital formation in India.

As a result, an inflow of foreign capital became one of the most important measures of economic development in both developed and developing countries.

Economists believe that FDI and FII have become enablers of international economic integration and stimulation. Foreign capital flows continue to play a significant role in the development of Indian stock markets.

FDI investments are not directly related to stock markets. However, such investments offer opportunities to industries for technological improvement, gaining access to global skills and practices, global competitive advantage, etc.

FII investments are directly related to stock markets. Such investments are helpful for the development & growth of stock markets.

These investments help increase the size of the stock markets and provide transparency, technology, investor protection, operational standards at par with international stock markets, etc.

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Is FII Included in FDI?

FIIs and FDIs are two separate terms. FIIs refer to institutional investors who make investments in entities outside their domestic country. FDIs refer to direct investments made by a foreign entity. 

Also Read: Difference Between Cash Market And Derivative Market!

Final Words

While FDI investments are beneficial for the entire country due to improvement in the country’s GDP, FII investments result in increasing the capital of the companies in the country. 

FDIs and FIIs are both important forms of investment for any country. These flows help create a transparent environment. These investments support the growth and development of the company which ultimately supports shareholders.

In India, investment in the form of FDI is preferred. This is because these investments help in bringing a lot more to the company than simply the capital inflow as these would contribute to the Indian development from the root levels. 

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