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A foreign institutional investor (FII) is a financial company that invests in the markets of a country other than the one it is based in. A number of financial firms engage in foreign investment for a wide variety of reasons ranging from a desire to diversify to plans to take advantage of emerging market trends in other countries. In a rather dramatic example, a number of pension funds in Britain invested in Icelandic companies prior to the financial crisis of the early 2000s, and many experienced substantial losses when the economy of Iceland crashed.
Foreign institutional investors can include mutual funds, hedge funds, pension funds, and insurance funds. In all cases, they are institutions rather than individual investors and some of them represent very large groups of investors, including other institutions like school districts, educational institutions, and so forth. They manage funds on behalf of their clients with the goal of achieving the highest possible returns. Some institutional investors are bigger risk takers than others, depending on the types of services they offer and the customers that they are catering to.
One reason to invest internationally is that it expands opportunities considerably. This promotes diversification, as long as the foreign institutional investor doesn't put all of its funds in one place. Diversification reduces risks and also provides more potential for profits, as companies can experiment with investment placements to find the best locations to put their money. In developing economies, there is a chance for a very high profit.
Working with a foreign institutional investor can also have benefits for the economy in the nation where the company is active. Overseas investments can improve economic health, increase liquidity, and provide more opportunities for economic growth. This can help nations address problems like indebtedness while also promoting international cooperation and establishing potentially profitable business partnerships overseas. A foreign institutional investor can play a role in everything from trade negotiations to securing funding for government programs.
Some nations have put limits in place that are designed to protect their economies. A foreign institutional investor may be required to register and to demonstrate that it is a legitimate operation. Once registered, it may be referred to as “qualified,” and qualification may be needed to access many types of investments. Nations may also put limits on the percentage of foreign ownership that any given company can have, to avoid situations where domestic companies end up being owned primarily by foreign investors.