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Meaning, Advantages, Disadvantages - Foreign Direct Investment(FDI) and Institutional Investors(FII) | 11th Commerce : International Finance

Chapter: 11th Commerce : International Finance

Foreign Direct Investment(FDI) and Institutional Investors(FII)

Foreign Direct Investment occurs when an investor based on one’s native country (the home country) acquires an asset or a company in another country (in host country) with the intention to manage the asset or the company.

Foreign Direct Investment and Institutional Investors


Foreign Direct Investment occurs  when  an investor based on one’s native country (the home country) acquires an asset or a company in another country (in host country) with the  intention  to  manage  the asset or the company. The investing company exercises control over decision- making in an enterprise located in a foreign country according to the level of equity shares held by it.

The foreign direct investments take the following forms

1.        Establishment of a new enterprise in a foreign country.

2.        Expansion of existing branch or subsidiary in a foreign country.

3.        Acquisition of enterprise located in a foreign country.

Prior to 1999, FDI was permitted selectively on a case to case basis with a normal ceiling of 40% of total equity capital. However a higher percentage of equity was permitted in the case of high-tech import areas and export oriented units. After the Economic liberalisation, the ceiling was removed and 100% of foreign equities are permitted only in selected sectors.



Foreign direct investment (FDI) is an investment made by a company or an individual in one country with business interests in another country,  in  the  form of either establishing business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company.


Advantages of FDI

1.        Achieving Higher Growth in National Income: Developing countries get much needed capital through FDI to achieve higher rate of growth in national income.

2.        Help in Addressing BOP Crisis: FDI provides inflow of foreign exchange resources into a country. This  helps  the country to solve adverse balance of payment position.

3.        Faster Economic Development: FDI brings technology, management and marketing skills along with it. These are crucial for achieving faster economic development of developing countries.

4.        Generating Employment Opportunities: FDI generates a lot of employment opportunities in developing countries, especially in high skill areas.

5.        Encouraging Competition in Host Countries: Entry of FDI into developing country promotes healthy competition therein.     This   leads   to   enterprise  in developing countries operating efficiently and effectively in the market. Consumers get a variety of products of good quality at market determined price which usually benefits the customers.


Disadvantages of FDI

1.        Exploiting Natural Resources: The FDI Companies deplete natural resources like water, forest, mines etc. As a result such resources are not available for the usage of common man in the host country.

2.        Heavy Outflow of capital: Foreign companies are said to take away huge funds in the form of dividend, royalty fees etc. This causes a huge outflow of capital from the host country.

3.        Not Transferring Technology: Some foreign enterprises do not transfer the technology to developing countries. They mostly transfer second hand technology to thehostcountry. Theykeepthefundamental aspects of technology with the parent company. In such case, the host country may not get the advantage of technology transfer and consequent economic development.

4.        Exploiting Cheap Labour: Foreign enterprises employ cheap labour force at a lower pay in developing countries. They  do not employ local people for higher posts in the management. Further they do not extend the privileges they usually give to the employees in their home country to the employees of the host country. Thus they are stated to exploit the labour in developing countries.

5.        Creating Monopolistic Environment: Multi National Companies (MNCs) which enter the host country through FDI route create monopolistic conditions in the host countries through their market power. They may not create competitive environment in the host country. Contrarily they may affect the competition altogether and establish supremacy.



Foreign Institutional Investors(FII)

The FII can be defined as an investment made bya Non-resident in equity of domestic company without intention of acquiring management control.

FIIs are the investments made by an individual investor or an investment fund, into the financial markets of another nation. Organisations like hedge funds, insurance companies, pension funds and mutual funds can be called as institutional investors.

Foreign Institutional Investors play a very important role in Indian economy. From 1992, Foreign Institutional Investors  (FIIs)  have  been   allowed to invest in  all   securities  traded  on the primary and secondary markets, including shares, debentures and warrants issued by companies. Over 1450 foreign institutional  investors have registered their names with the Securities and Exchange Board of India (SEBI), the regulator for the securities market in India.


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11th Commerce : International Finance : Foreign Direct Investment(FDI) and Institutional Investors(FII) | Meaning, Advantages, Disadvantages

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