Question

Both Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) are related to investment in a country. Which one of the following statements best represents an important difference between the two?

• A. FII helps bring better management skills and technology while FDI only bring capital
• B. FII helps in increasing capital availability in general, while FDI only targets specific sectors
• C. FDI flows only into secondary markets while FII targets primary markets
• D. FII is considered to be more stable than FDI

Answer 1

The Correct Option is B

Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) are both mechanisms through which investment enters a country but differ in their nature and implications. A key distinction is how they allocate their investments: 

FDI: FDI involves investment directly into production or business in a country by an entity from another country, typically by acquiring a lasting interest or by purchasing a share strong enough to exert managerial control. This type of investment is usually long-term and targets specific sectors, directly influencing the host country's industrial structure and employment through significant stakes in companies.

FII: By contrast, FII refers to investment by foreign investors in financial markets of a host country in the form of securities or financial instruments. These investments are usually made in the secondary market, focusing on creating a quick financial return without the intention of taking lasting control over the enterprise. FIIs tend to increase the general availability of capital because their investments are not constrained to specific sectors or companies.

The critical difference underscored here is that while FII contributes broadly to increased capital availability across various market sectors, FDI focuses on targeted investments that drive long-term sector-specific growth.

Thus, the correct option is: FII helps in increasing capital availability in general, while FDI only targets specific sectors.