A lot has been written on FDI (Foreign Direct Investment) and FII (Foreign Institutional Investor) already,

and I found a great succinct explanation from Business Line explaining the difference between FDI and
FII investments as one flowing into the stock market (FII) and the other flowing into the primary
market (FDI), and all other differences emerging out of that one key point.

FDI (Foreign Direct Investment) is when a foreign company invests in India directly by setting up a wholly
owned subsidiary or getting into a joint venture, and conducting their business in India.

IBM India is a wholly owned subsidiary of IBM, and is a good example of FDI where a foreign company
has set up a subsidiary in India and is conducting its business through that company. Whats amazing
about IBM is that, it is now the largest Indian IT company in India. It is serving Indian customers, and a
large domestic market that was not tapped by the Indian players themselves.

Foreign companies partnering with Indian companies to set up joint ventures is more typical and
Starbucks partnering with Tata Global Beverages Limited is a recent example of FDI through joint
venture, but there are several others in the insurance, telecom, food industry etc.

FII is when foreign investors invest in the shares of a company that is listed in India, or in bonds offered
by an Indian company. So, if a foreign investor buys shares in Infosys then that qualifies as FII
Investment.

It is easy to see why you would prefer FDI to FII investments. FDI investments are more stable because
companies like IBM set up offices, hire employees, and have a long term plan for the country. IBM cant
just pull out a few million dollars from India overnight, which is what FII investors do from time to time
and that leads to market crashes.

In India, attracting FII has been easier than FDI because of the policy uncertainty and procedural delays.
An RBI study has the following para on FDI slowdown and it is easy to see how it is tied to the politics in
the country.

Procedural delays are bothering nearly all of the respondents with almost 93 percent of the
respondents indicating this issue to be quite to very serious. The time consuming systems and
procedures to be complied with, the bureaucratic layers to be dealt with and the multiple bodies from

which clearances are to be obtained- all add up substantially to the transaction cost involved and take
up a lot of management time thus making it an issue of serious concern for the investors (FDI
Survey by FICCI, December 2010).

Both FDI and FII investments are good for the economy, but I feel that FDI is where the focus should be
and this is where India is lagging behind badly. There are several things that can be done to improve FDI
investments, and hopefully, things will get done before India hits another crisis.