FDI Vs FII

It ls most lmportunt to understund dlstlnctlon between these two. When FDI comes ln the country
then lt ls essentlully ln the form of long term lnvestment whlch wlll not only brlng funds but creute
|ob opportunlty too. Whereus when FII brlngs fund ln the country, lt ls essentlully for short term
und prlmurlly lnvested ln cupltul murkets but wlll not leud to uny other economlc uctlvlty llke |ob
creutlon, etc. It ls cleur from thls us to whlch mode of fund flow ls lntended und why. However,
some belleve cupltul murkets ure lndlcutlons of how good or well the development ls huppenlng
ln
the country.

Forelgn dlrect lnvestment (FDI) flows lnto the prlmury murket whereus forelgn lnstltutlonul
lnvestment (FII) flows lnto the secondury murket, thut ls, lnto the stock murket.
All other dlfferences flow from thls prlmury dlfference.
Y FDI
O FDI ls percelved to be more beneflclul becuuse lt lncreuses productlon, brlngs ln more
und better products und servlces besldes lncreuslng the employment opportunltles und
revenue for the Government by wuy of tuxes.

O FII, on the other hund, ls percelved to be lnferlor to FDI becuuse lt only wldens und
deepens the stock exchunges und provldes u better prlce dlscovery process for the scrlps.
Besldes, FII ls u fulr-weuther frlend und cun desert the nutlon whlch ls whut ls huppenlng ln Indlu
rlght now, thereby pullng down not only our shure prlces but ulso wrecklng huvoc wlth the Indlun
rupee becuuse when FIIs sell ln u blg wuy und leuve Indlu they tuke buck the dollurs they hud
brought ln.
Y lt ls preferred.
FDI ls preferred over FII lnvestments slnce lt ls consldered to be the most beneflclul form of
forelgn lnvestment for the economy us u whole.
Dlrect lnvestment turgets u speclflc enterprlse, wlth the ulm of lncreuslng lts cupuclty/productlvlty
or chunglng lts munugement control.
Dlrect lnvestment to creute or uugment cupuclty ensures thut the cupltul lnflow trunslutes lnto
uddltlonul productlon.
In the cuse of FII lnvestment thut flows lnto the secondury murket, the effect ls to lncreuse cupltul
uvullublllty ln generul, ruther thun uvullublllty of cupltul to u purtlculur enterprlse.
. There ls u wldespreud notlon thut FII lnflows ure hot money thut lt comes und goes, creutlng
volutlllty ln the stock murket und exchunge rutes. Whlle thls mlght be true of lndlvlduul funds,
cumulutlvely, FII lnflows huve only provlded net lnflows of cupltul.

FDI tends to be much more stuble thun FII lnflows. Moreover, FDI brlngs not |ust cupltul but
ulso better munugement und governunce pructlces und, often, technology trunsfer. The know-
how thus trunsferred ulong wlth FDI ls often more cruclul thun the cupltul per se. No such beneflt
uccrues ln the cuse of FII lnflows.

Accordlng to the Prlme Mlnlsters Economlc Advlsory Commlttee, net FDI lnflows umounted to
S8.5 bllllon ln 2006-07 und ls estlmuted to huve gone up to S15.5 bllllon ln 07-08. The punel feels
FDI lnflows would lncreuse to S19.7 bllllon durlng the current flnunclul yeur. FDI up to 100% ls
ullowed ln sectors llke textlles or uutomoblles whlle the government hus put ln pluce forelgn
lnvestment celllngs ln the cuse of sectors llke telecom (74%). In some ureus llke gumbllng or
lottery, no forelgn lnvestment ls ullowed.

The government ullows greuter freedom to FDI ln vurlous sectors us compured to FII
lnvestments. However, there ure pecullur cuses llke ulrllnes where forelgn lnvestment, lncludlng
FII lnvestment, ls ullowed to the extent of 49%, but FDI from forelgn ulrllnes ls not ullowed.


MNC ln Indlu: Current Illustrutlons
lndla ls one of Lhe mosL promlslng and fasLesLgrowlng economles ln Lhe world
1oday vlrLually all Lhe blg MnCs ln Lhe world have operaLlons ln lndla 1hese lnclude unllever 8A1
ColgaLe almollve rocLer Camble Ceneral LlecLrlc Ceneral MoLors lord epsl l8M lnLel 1exas
lnsLrumenLs MlcrosofL Cracle and CocaCola lndla ls now consldered by many MnCs Lo be a
sLraLeglcally lmporLanL markeL

PlsLorlcally Lhe maln reason for Lhe enLry of MnCs lnLo lndla was Lo [ump Lhe Larlff wall Plgh lmporL
duLles made lL dlfflculL lf noL lmposslble Lo exporL flnlshed goods from Lhe home counLry Lo lndla Cn
Lhe oLher hand once Lhey enLered Lhe counLry and seL up operaLlons Lhe counLrys hlgh Larlffs
guaranLeed adequaLe proLecLlon ln some cases Lhe need Lo cusLomlse producLs necesslLaLed a
sLrong local presence unllever seL up lLs lndlan subsldlary PlndusLan Lever and gave lL full freedom
Lo develop varlous producLs Lo sulL local LasLes and usage condlLlons 1hls would obvlously noL have
been posslble lf unllever had only been exporLlng lLs producLs Lo lndla

ln recenL Llmes oLher reasons have made lndla an aLLracLlve desLlnaLlon for MnCs lndla has
emerged as a low cosL back offlce manufacLurlng and research base Lhanks Lo lLs skllled buL
relaLlvely cheap manpower ln Lhe compuLer sofLware lndusLry many MnCs are esLabllshlng
offshore developmenL cenLres Lo Lap local manpower l8M AccenLure LuS and CompuLer
AssoclaLes have all been sLrengLhenlng Lhelr presence ln Lhe counLry

uell and uelolLLe have ma[or back offlce operaLlons ln Lhe counLry Ceneral LlecLrlc (CL) ls looklng
aL lndla as an lmporLanL 8u base whlch can conLrlbuLe Lo Lhelr global knowledge pool CLs local
ouLflL has flled for several paLenLs ln Lhe lasL couple of years nokla has seL up Lhree 8u cenLres
LhaL work on nexLgeneraLlon packeLswlLched moblle Lechnologles and communlcaLlons soluLlons
1exas lnsLrumenLs ls also dolng cuLLlng edge 8u work ln Lhe counLry

nokla ls anoLher MnC whlch has shown sLrong commlLmenL Lo Lhe lndlan markeL by maklng
necessary lnvesLmenLs lrom seLLlng up a manufacLurlng base for handseLs ln lndla Lo creaLlng
flnanclng opLlons for cellphones Lo worklng wlLh cellular operaLors Lo reduce alrLlme cosLs nokla
has launched varlous lnlLlaLlves Lo lower Lhe cosL of ownlng and uslng a moblle phone

LC ls Lrylng Lo bulld on lLs early success by aggresslvely peneLraLlng Lhe rural markeLs and by offerlng
more value for money lLems lor Lhe rural markeL LC has launched a sLrlpped down range of
Lelevlslon seLs called Sampoorna

AnoLher company whlch has Laken Lhe rural markeLs serlously ls Coca Cola ln Lhe rural areas Coca
Cola has used a LhreeLler hubandspoke dlsLrlbuLlon model Lo ensure deeper peneLraLlon 1he
company depoL supplles Lwlce a week Lo large dlsLrlbuLors who acL as hubs