What is the fundamental difference between Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII/FPI)?
- FDI is short-term and highly volatile, while FII is long-term and stable
- FDI involves acquiring a lasting interest and control in an enterprise, while FII is purely portfolio investment in financial assets without management control
- FDI is restricted to the manufacturing sector, while FII is restricted to the agricultural sector
- FDI requires RBI approval, while FII requires only SEBI approval
Answer: FDI involves acquiring a lasting interest and control in an enterprise, while FII is purely portfolio investment in financial assets without management control
FDI is driven by strategic, long-term interests where the foreign investor seeks to influence or manage the business operations, often bringing technology and managerial expertise. FII (or FPI) is driven by short-to-medium-term financial returns; investors buy stocks or bonds in the secondary market and can quickly pull their money out ('hot money') if market conditions change, making FII much more volatile than FDI.