The Foreign investment pertains to those investments which made by the residents of a country in the financial assets and production processes of another country. From country to country its effect varies. It can affect the factor productivity of the recipient country and can also affect the balance of payments. Foreign investment provides a channel through which countries can gain access to foreign capital. It can come in two forms: foreign direct investment (FDI) and foreign institutional investment (FII). Foreign direct investment involves in direct production activities and is also of a medium- to long-term nature. But foreign institutional investment is a short-term investment, mostly in the financial markets. FII, given its short-term nature, can have bidirectional causation with the returns of other domestic financial markets such as money markets, stock markets, and foreign exchange markets. Hence, understanding the determinants of FII is very important for any emerging economy as FII exerts a larger impact on the domestic financial markets in the short run and a real impact in the long run. India, being a capital scarce country, has taken many measures to attract foreign investment since the beginning of reforms in 1991.
In this world, India is the second largest country with a population of over 1 billion people. As a developing country, India’s economy is characterized by wage rates that are significantly lower than those in most developed countries. These two traits combine to make India a natural destination for foreign direct investment (FDI) and foreign institutional investment (FII). Until recently, however, India has attracted only a small share of global foreign direct investment (FDI) and foreign institutional investment (FII), primarily due to government restrictions on foreign involvement in the economy. But beginning in 1991 and accelerating rapidly since 2000, India has liberalized its investment regulations and actively encouraged new foreign investment, a sharp reversal from decades of discouraging economic integration with the global economy.
The world is increasingly becoming interdependent. Goods and services followed by the financial transaction are moving across the borders. In fact, the world has become a borderless world. With the globalization of the various markets, international financial flows have so far been in excess for the goods and services among the trading countries of the world. Of the different types of financial inflows, the foreign direct investment (FDI) and foreign institutional investment (FII)) has played an important role in the process of development of many economies. Further many developing countries consider foreign direct investment (FDI) and foreign institutional investment (FII) as an important element in their development strategy among the various forms of foreign assistance.
Both FDI and FII is related to investment in a foreign country. FDI or Foreign Direct Investment is an investment that a parent company makes in a foreign country. On the contrary, FII or Foreign Institutional Investor is an investment made by an investor in the markets of a foreign nation.
In FII, the companies only need to get registered in the stock exchange to make investments. But FDI is quite different from it as they invest in a foreign nation.
The Foreign Institutional Investor is also known as hot money as the investors have the liberty to sell it and take it back. But in Foreign Direct Investment, this is not possible. In simple words, FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit that easily. This difference is what makes nations to choose FDI’s more than then FIIs.
FDI is more preferred to the FII as they are considered to be the most beneficial kind of foreign investment for the whole economy.
Foreign Direct Investment only targets a specific enterprise. It aims to increase the enterprises capacity or productivity or change its management control. In an FDI, the capital inflow is translated into additional production. The FII investment flows only into the secondary market. It helps in increasing capital availability in general rather than enhancing the capital of a specific enterprise.
The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor. FDI not only brings in capital but also helps in good governance practices and better management skills and even technology transfer. Though the Foreign Institutional Investor helps in promoting good governance and improving accounting, it does not come out with any other benefits of the FDI.
While the FDI flows into the primary market, the FII flows into secondary market. While FIIs are short-term investments, the FDI’s are long term.
1. FDI is an investment that a parent company makes in a foreign country. On the contrary, FII is an investment made by an investor in the markets of a foreign nation.
2. FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit that easily.
3. Foreign Direct Investment targets a specific enterprise. The FII increasing capital availability in general.
4. The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor