Foreign Direct Investment V/s Foreign Portfolio Investment

 


India is being viewed as a highly potential investment market globally. To enter any foreign market
the two most common ways are through a FDI (Foreign direct investment) or a FII (Foreign
Institutional Investment). In layman’s language when a company situated in one country makes an
investment in a country abroad it is known as FDI; and when companies make investments in the
stocks of another country it is known as FII. FDI is made to acquire ownership in an enterprise of the
host country whereas FII is made to invest in the financial market of the host country. FDI comes
with a control on the investee enterprise but FII doesn’t have any control associated with it. For the
Indian economy both FDI and FII are important. FDI has difficult entry and exit barriers with the
intention of gaining a long- lasting interest in the investee enterprise. FII doesn’t have many entry
and exit barriers thus, are a source of quick but short term capital for the country. FDIs have targets
on specific enterprises whereas FIIs invest in the financial institutes are only concerned about the
returns. FDI not only brings funds to the country but also involves a transfer of resources,
technology, know-how and strategies wherein FII only brings in funds to the country. FDI results in
generation of employment in the country and has a very slow but long- term positive impact the
Gross Domestic Product (GDP) of the host country. FII by bringing in capital, positively impacts the
stocks of the country (because when foreign companies invest in the stocks of the host country
global rating of the stocks of the later goes higher resulting in the increase of stock prices), but since
FIIs have easy entry and exit barriers capital brought in by FIIs is short term that creates a bubble
effect and result in inflation in the country.
From the above arguments, it is clear that FDIs and FIIs are important but have both
negative and positive impacts on the country. However, FDI is considered better for the host
company as it not brings in capital but also amounts for better technology, resources, governance
and management in the country. India has eased out the entry and exit barriers for both in the
recent years but still has restrictions in certain industries for any company to make a FDI.