Considered as a catalyst or a growth booster to the economic development of any country, Foreign Investments are usually seen as a boon by the various institutions, organizations or businesses and even individuals for that matter.
Foreign Investment is the flow of investment from one country into another.
Generally, the investors have to perform a thorough analysis of all the risk factors, political stability, forex stability, Tax benefits, overall investment required and many other such crucial factors before they decide to invest in the Foreign Direct Investment (FDI) or whether to invest in the Foreign Institutional Investment (FII).
Both come with their own boons and banes. But before we dive deeper into which one is better, let us first understand the meaning and relevance of each of these terms.
What is Foreign Direct Investment?
FDI or Foreign Direct Investment refers to the investment done by a company, institution or individual in a company outside of their own country. Generally, developing countries, which are in need of more funds and utilization of resources try to seek the FDI way of investment from foreign companies or individuals.
Through FDI, the investors have a good amount of management control on the operations of the business in the host country.
What is Foreign Institutional Investor?
Foreign Institutional Investment refers to the investment made by the investors by infusing capital into the financial assets of any foreign country.
Institutional investors are nothing but companies desiring to make a quick buck by investing into the various investment banks, hedge funds, pension funds, mutual funds, insurance bonds, debentures, etc. of a foreign country.
They generally have no control on the management of any companies or banks in the host country in which they are investing.
Now, that we know what is an FDI and FII, let us now understand the major difference between the two forms of foreign investments.
Foreign Direct Investment (FDI) Vs. Foreign Institutional Investor
Both being the types of foreign investments, there is however, a stark difference in the way they are operated, whom do they target, and the returns that can be derived from both.
Control of management
FDI being a direct form of investment into a foreign company, the investors are more interested and even get to enjoy a higher control on the management of the company, even if it is in the foreign country.
On the contrary, FII just allows for funds to be invested into the financial market of the host country and therefore, doesn’t have much hold onto the managerial decisions, or rather are referred to as just passive investors.
Regulations on Entry and Exit criteria
Truth be told, usually, there are more barriers on the entry and exit criteria of the FDI as opposed to the FII which is pretty lenient in that case. For example, the nuclear energy sector does not allow for FDI.
Allows transfer of
FDI helps in the transfer of a lot of skilled resources, new and improved technologies, Research and Development, Capital, strategies and management, etc. whereas, FII helps in the transfer of Funds or capital only into the host country’s financial assets or institutions.
What they result in?
FDI for sure results in a long-term capital inflow, as it really takes time to settle from the planning and strategy stage to the implementation and execution phase of a company.
On the other hand, for FII, their investment horizon entirely depends upon the current situation in the host country’s economy, which when stable leads to long-term investments, and when turbulent, results in capital pull back by the investors.
Economic development of the host country
FDI results in the overall economic growth that is long-term by bringing in not only the capital into the host country, but also takes it further on the route to development through new technology and infrastructure investment, increasing new employment opportunities, increased skilled workforce by proper training, etc.
On the other hand, FII just brings in funds, which certainly does not help in the economic growth or increment in the GDP of the host country as such. But it just adds into the capital in the economy.
In conclusion, we would like to add that both the forms of investments have their own pluses and minuses, with their own relevance in their particular sectors.
But, looking at it from the host country’s perspective, certainly the FDI takes away the glory since, it helps in the major development, infrastructure wise or resource and technology wise of the country. And all of this eventually results in the holistic and rapid growth of the economy and thus a higher GDP of the host country.