FDI Vs FII: 5 Key Differences

FDI Vs FII

FDI and FII are permitted to engage in different types of transactions that are significantly different. 

In general, foreign direct investment can take two forms: foreign institutional investment (FII) and foreign direct investment (FDI).

Foreign direct investment is an investment that involves direct production activities and is generally of a medium- to a long-term character. The majority of foreign institutional investment occurs in the financial markets and is a short-term investment.

Foreign Direct Investment (FDI)

FDI or Foreign direct investment refers to an entity based in another country taking control of a business in another country. This type of foreign investment is called as Foreign Direct Investment. The concept of direct control, therefore, distinguishes it from foreign portfolio investment. 

Foreign Institutional Investor (FII)

FII or Foreign Institutional Investor refers to an investor or investment fund based in a country other than the one in which it is registered or has its headquarters. Foreign institutional investors are most commonly used in India, where it refers to outside investors who participate in Indian financial markets. This refers as Foreign Institutional Investor.

Also Read: Investment Decision: Definition, Process, Types

FDI vs FII – Key Differences

We have now outlined the definitions of FDI and FII, so let us now compare the two investment strategies. FDI and FII can be distinguished by the following points.

1. Exiting versus entering an investment

Whenever you invest, it is important to evaluate whether the investment can be entered and exited. The process of entering and exiting an FII is quite simple, and one makes significant profits in a short time frame.

On the other hand, FDI investments are more regulated and may require government approval, which explains why they are quite difficult to enter or exit.

2. The ideal term for an investment

Another difference between FDI and FII is the term of investment. Foreign direct investments are suitable for long-term investors.

By investing in the company, long-term capital is brought to the organization. In contrast, investors who are seeking both short and long-term investment returns may opt to invest in FIIs.

3. Investment type

FDI and FII differ in important ways concerning the types of transactions they are permitted to enter into. FII is primarily concerned with the transfer of funds. FDI investments, on the other hand, do more than simply transfer money.

The offshore company that makes an FDI investment in another country transfers its resources, technologies, technical know-how, skills, and strategies, among others.

4. Economic consequences

Foreign direct investment has a profound effect on the economy of a country in two important ways: it creates employment opportunities and increases the economic output of the invested company.

Moreover, the investments contribute to the development of the infrastructure in the country where the investments are made, thus improving the purchasing power of the foreign country. Foreign direct investment thus contributes to economic growth.

Comparisons between Foreign Direct Investment (FDI) and Foreign Direct Investment (FII) cannot be drawn because FIIs only increase a country’s capital.

5. The investment target and control of the company

Foreign direct investment typically targets specific companies as well as acquiring management control of the invested company. The company does not exert any control over FIIs since there is no specific target.

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Frequently Asked Questions

Which is more beneficial, FDI or FII?

FDI is directed toward the primary market while FII is directed toward the secondary market. The money invested by FII is referred to as ‘Hot Money’ because the investors have the option to sell it and return it. It is considered that foreign direct investment (FDI) is far more valuable than foreign direct investment (FII) as it is the most beneficial form of foreign investment for the economy in general.


Is FDI the same as FII?

In general, foreign direct investment can take two forms: foreign institutional investment (FII) and foreign direct investment (FDI). Foreign direct investment is an investment that involves direct production activities and is generally of a medium- to a long-term character. The majority of foreign institutional investment occurs in the financial markets and is a short-term investment.


How does foreign direct investment differ from outsourcing?

For foreign direct investment, technology transmission costs are higher, but input production distortion is lower by the affiliate supplier, whereas outsourcing has low technology transmission costs, but it has a high distortion in input production by the arm’s length supplier.


What is an FII activity?

Investors established outside India who participate in Indian financial markets are called FIIs (Foreign Institutional Investors) or FPIs (Foreign Portfolio Investors). The Securities and Exchange Board of India (SEBI) must be contacted to participate in the Indian financial market.


Is it possible to invest in FII?

Investors wishing to invest in India are defined as pension funds, mutual funds, investment trusts, insurance companies, or reinsurance companies. The SEBI must approve a pension fund’s application to register as an FII. Pension funds may also be set up as sub-accounts.