What is the difference between FDI and FII?

by Manshu on April 7, 2013

in Economy

Vikas posted the following comment on the Suggest a Topic page a few days ago:

Vikas Ganjave March 30, 2013 at 9:13 am [edit]

Can you write an article on difference between FDI and FII citing examples?


A lot has been written on FDI (Foreign Direct Investment) and FII (Foreign Institutional Investor) already, and I found a great succinct explanation from Business Line explaining the difference between FDI and FII investments as one flowing into the stock market (FII) and the other flowing into the primary market (FDI), and all other differences emerging out of that one key point.

FDI (Foreign Direct Investment) is when a foreign company invests in India directly by setting up a wholly owned subsidiary or getting into a joint venture, and conducting their business in India.

IBM India is a wholly owned subsidiary of IBM, and is a good example of FDI where a foreign company has set up a subsidiary in India and is conducting its business through that company. What’s amazing about IBM is that, it is now the largest Indian IT company in India. It is serving Indian customers, and a large domestic market that was not tapped by the Indian players themselves.

Foreign companies partnering with Indian companies to set up joint ventures is more typical and Starbucks partnering with Tata Global Beverages Limited is a recent example of FDI through joint venture, but there are several others in the insurance, telecom, food industry etc.

FII is when foreign investors invest in the shares of a company that is listed in India, or in bonds offered by an Indian company. So, if a foreign investor buys shares in Infosys then that qualifies as FII Investment.

It is easy to see why you would prefer FDI to FII investments. FDI investments are more stable because companies like IBM set up offices, hire employees, and have a long term plan for the country. IBM can’t just pull out a few million dollars from India overnight, which is what FII investors do from time to time and that leads to market crashes.

In India, attracting FII has been easier than FDI because of the policy uncertainty and procedural delays. An RBI study has the following para on FDI slowdown and it is easy to see how it is tied to the politics in the country.

“Procedural delays are bothering nearly all of the respondents with almost 93 percent of the respondents indicating this issue to be ‘quite to very serious’. The time consuming systems and procedures to be complied with, the bureaucratic layers to be dealt with and the multiple bodies from which clearances are to be obtained- all add up substantially to the transaction cost involved and take up a lot of management time thus making it an issue of serious concern for the investors” (FDI Survey by FICCI, December 2010).

Both FDI and FII investments are good for the economy, but I feel that FDI is where the focus should be and this is where India is lagging behind badly. There are several things that can be done to improve FDI investments, and hopefully, things will get done before India hits another crisis.

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