Foreign direct investment is that investment, which is made to serve the business interests of the investor in a company, which is in a different nation distinct from the investor’s country of origin. The parent enterprise through its foreign direct investment effort seeks to exercise substantial control over the foreign affiliate company. Example – An American company taking a majority stake in a company in India.
Factors affecting the FDI
· Financial incentives (Funds from local Government)
· Fiscal Policy / Tax incentives (Exemption from import duties)
· Indirect incentives (Provides land and other resources)
· Political stability
· Market potential & accessibility
· Large economy
· Market size
Advantage of FDI
· Employment and skill levels
· Technology diffusion and knowledge transfer
· Linkages and spillover to domestic firms
· Improved technology.
· Management expertise.
· Access to international markets
Foreign Institutional Investors
An investor or investment fund that is from or registered in a country outside of the one in which it is currently investing with a sole motto of investment and repatriation after the specified period. Institutional investors include
· hedge funds,
· insurance companies,
· pension funds and mutual funds
Advantage of FIIs
· Unavailability of Corporate Debt
· Increase Forex Reserve
· Increase Domestic Savings and Investments
· Large Availability of Capital
Disadvantage of FIIs
· Problem of inflation
· Reduces flexibility of Policy makers
· False representation of Economy
· Can’t be used for long term
· Problems for small investors
FDI is better than FIIs if, we want the long term development of country because by foreign direct investment in Infrastructure, employment, living standard of the people becomes better and it helps the developing economy to become developed.