For the sake of simplicity, home country is assumed to be India.
You are a businessman living in USA and you have idle funds which you want to invest then you have 3 ways to do it.
- If you have large capital base then you can try opening a business by acquiring a business in India or setting up a new unit. (FDI)
- If you have normal capital base and you don’t have time to look after the business but still want to have the controlling interest in India then you can choose to acquire equity of company in India. Say 20-30%. (FPI)
- If you already have a good portfolio but you want to diversify investments, you may consider investing in securities like debentures, bonds, shares or real property etc. in India. (FII)
A Foreign direct investment (FDI) is a controlling ownership in a business enterprise in one country by an entity based in another country.
Explanation – In simple words, it is the investment by a foreign company in India in controlling interest which means setting up businesses and entering into joint venture, by mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra-company loans. The name also suggests that this is direct investment which means an investment in primary market. The motive is to start up a business in India.
A Foreign portfolio investment is an investment in equity by one country in another country.
Explanation – Investment by a foreign country in India in equity. The motive is to ensure a controlling interest in India without investing huge amount as in FDI. It also ensures flexibility in entry and exit.
A Foreign institutional investment (FII) is investment in securities, real property and other investment assets by one country in another country.
Explanation – It is the investment by a foreign company in India in secondary market of India. Investors include mutual fund companies, hedge fund companies etc. Motive is not to take controlling interest of the company but to diversify portfolio ensuring hedging, high returns with quick entry and exit.