Difference Between FDI And FII Explained In 10 Points

Finance is the lifeline of any business and entrepreneurs use it to not only fund their operations but also make technological innovations. Typically, FDI and FII are the methods of raising funds. However, both these approaches are not only limited to the business but also have impacts on the wider entire economy. Even though there is a lot of difference between FDI and FII in their forms and practice, they play equally important roles in the nation-building process. Here, you can find some key details on FDI vs FII that are listed down below.

What Is FDI?

When a foreign company or organization invests in an Indian company with a long-term view, it is known as FDI or Foreign Direct Investment. The goal of this investment is to develop a long-term interest in the investee company. The investor corporation extends management control and influences decisions of the investee company. Owing to these characteristics, this investment is also referred to as a direct investment.

Often, FDI bring in much more than just finance. It is also one of the main ways to receive latest technology. Developed and industrialized nations with good financial strength can provide financing to the developing nations, mainly to those whose financial resources are limited. There are various methods for foreign investors to acquire the ownership in the organization they invested in. These include merger or acquisition (M&A), stock purchase, joint venture participation, or the creation of a wholly-owned subsidiary.

FDI – Advantages and Disadvantages

FDI fosters the creation of a more competitive business climate which pushes other businesses to improve the quality of their product/service at a lower cost, which in turn raises the standard of goods and services across industries.
It increases the number of jobs available to the working population.
FDI benefits the nation in various ways. It brings in new technology, capabilities, knowledge, and financial resources for economic growth and development.

However, FDI has disadvantages as well.

A major disadvantage of FDI is that it may harm domestic investments and domestic businesses. Small businesses in a developing nation might not be strong enough to withstand the influx of MNCs (investment) in their industry. Rising FDI in an industry increases the risk of local firms going out of business. It might also harm a nation’s currency exchange rates.

What Is FII?

The term “Foreign Institutional Investor,” or FII, refers to the investor or a group of investors who gather their funds to buy national assets located in overseas locations. It is a tool for investors to quickly make money by purchasing and selling securities in the secondary market. In order to make the investment, it needs to register with the relevant country’s securities market regulator. FIIs are crucial to the economy of every nation. When FIIs invest or purchase securities, the stock market tends to go up. Similarly, stock market goes down when FIIs pull the money out of the country. Institutional investors include hedge funds, mutual funds, pension funds and investment banks.

In order to boost the influx of foreign investments, the Securities and Exchange Board of India (SEBI) changed its rules in 1996-97 and allowed FIIs, NRIs, and OCBs to acquire up to 10% of an organization’s stock, subject to an all-out venture limit of 24%.

As one can see, FIIs can easily invest in a company’s stock and can equally easily pull out its investment. Among FII and FDI differences, this is a major point. FDI vs FII

FII – Advantages and Disadvantages

FIIs bring-in depth in securities markets by providing liquidity.
FIIs help in enhancing the flow of equity capital.
The enhanced flow of the equity capital helps in improving the capital structure of the economy which in turn helps in bridging the investment gap.

FII are instrumental in managing uncertainty and in controlling the risks. However, there are a few demerits of FIIs’ impact on the economy as well.

The flow of excess funds in the economy increases the demand for the rupee. The RBI pumps the money to create more demand in the market. This leads to an increase in inflation.
The increase or decrease of the FII investment plays an important role in the securities markets, especially the stock market. This poses threat for the small retail investors, whose finances are dependent on the actions of these large FIIs.
The increase in the demand for currency makes the export industry uncompetitive because of the domestic currency’s appreciation

It is easy to understand now why FDI is preferred over FII. The former leads to establishment of offices, recruit staff, and have a long-term strategy. A key FII and FDI difference is that FDI investments are also more stable than FII investments. An FDI investor cannot withdraw a few million dollars from the country over night, in comparison to FII investors who occasionally do this and bring instability in stock market.