Understanding the difference between FII and FDI
Both are critical sources of capital that can boost economic growth but they differ in terms of their characteristics and impact on the host country
Foreign Institutional Investment (FII) and Foreign Direct Investment (FDI) are two important forms of investment that countries receive from foreign sources. Both are critical sources of capital that can boost economic growth but they differ in terms of their characteristics and impact on the host country.
Foreign Institutional Investment (FII) refers to investment made by foreign institutional investors such as mutual funds, pension funds, hedge funds and foreign portfolio investors (FPIs) into the financial markets of a host country. FIIs are typically interested in investing in stocks, bonds and other securities and are known for their short-term investment horizons. They are driven primarily by the expectation of high returns and are prone to fluctuations in market conditions. The impact of FII on a country's economy is largely short-term and can be volatile. FII is a more liquid form of investment and it can easily flow in and out of the market.
On the other hand, Foreign Direct Investment (FDI) refers to investment made by a foreign company or entity in a host country's physical assets or infrastructure, such as factories, land, buildings and other long-term capital assets. FDI is a long-term investment that is typically made with the aim of establishing a presence in the host country, improving productivity and expanding operations. FDI creates jobs and contributes to the overall economic growth of the host country. It is less volatile than FII since it involves long-term commitments and has a more permanent impact on the host country.
In conclusion, while FII and FDI are both important sources of investment, they differ significantly in terms of their characteristics and impact on the host country. FII is a more liquid, short-term and volatile investment that primarily involves investment in financial markets, while FDI is a long-term investment made with the aim of establishing a physical presence in the host country and contributing to its economic growth.