Foreign capital in a country comes in two ways. They are:

1. Foreign Institutional Investor (FII) and
2. Foreign Direct Investment (FDI)

1. Foreign institutional Investor (FII):

• Those foreign companies that invest in financial institutions and bond/ stock/share markets of another country are called Foreign Institutional Investors (Fll). Such an investment is also called portfolio investment. Fils are the big companies such as investment banks, mutual fund houses, etc. who invest considerable amount of money in the Indian markets.
• Such companies have to register in India as Foreign Institutional Investors. Then they buy such stocks from the bond/share market of India.
•  Thus, instead of investing in plant and machinery in another country like India these companies invest in the financial market.
• The limit of investment that these companies can make is decided by India.
• These investment companies do not have direct stake in the management of the ‘home companies’ i.e. the companies of India for which they buy share, bonds etc. from the market. As a result, the home companies do not get capital directly in their hands. They get it through the shares that Fils buy from the Indian market.
• An important characteristic of such investment is that home countries or say companies of home countries i.e. home companies receive the investment very fast and may also lose it very fast if the Fils sell the shares.
• Hence, funds take a flight in and out of the country easily. So this is considered to be a risky and unstable kind of foreign capital.

2. Foreign Direct Investment (FDI):

• When the home country invites capital from foreign countries by allowing * foreign investors/companies to produce and sell directly in India than such an investment is called foreign direct investment (FDI).
• In FDI, foreign companies directly set up their business in India by constructing their plants, bringing in technology and producing or by collaborating with Indian companies for the same.
• These companies either manage the entire business or have a partial control in management in case if they are collaborating partners.
• For example, Vodafone fully owns its business in India. Similarly, in Tata-AIG insurance company, AIG which is a foreign company has collaborated with Tata in India.
• India has systematically allowed FDI in increased proportion in various sectors and hence India’s foreign exchange earnings have increased.

Nature of Foreign Direct Investment:

• It is a physical establishment in the form of direct investment and hence a stable form of investment.
• It brings machines, materials and wealth to the home country.
• It brings new technology to the country.
• It brings a different work culture.