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 ?

Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) differ significantly in their nature and impact. FDI is a long-term investment where a parent company targets a specific enterprise to increase its capacity, productivity, or management control [2]. It often involves the transfer of technology and management skills [1]. In contrast, FII (often categorized under Foreign Portfolio Investment) primarily involves purchasing securities in the financial markets, which increases general capital availability in the economy [3]. While FDI typically flows through the primary market to create new assets, FII flows predominantly into the secondary market [2]. Furthermore, FII is considered 'hot money' and is more volatile and short-term compared to the stable, long-term nature of FDI [3]. Therefore, the statement that FII increases general capital availability while FDI targets specific sectors/enterprises best represents their functional difference.

Sources

1. [2] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > b. Depository Receipt > p. 478
2. [1] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.23 Foreign Investment > p. 99
3. [3] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > a. Foreign Institutional Investment (FII) > p. 477