Institutional investors are corporations, banks, pension funds, mutual funds, and other forms of pooled capital which act as one entity to engage in securities transactions in the best interest of the constituents or company that they represent.

Foreign Institutional Investors are those whose company is based in another country. Investments made on behalf of foreign companies, foreign financial institutions, and foreign funds (such as the foreign equivalent of hedge funds, mutual funds, and pension funds) are foreign institutional investments. There are usually reporting requirements for both the foreign government for the county in which the interests are held and for the domestic government of the institutional investor.

Part of this has to do with accounting so that countries will know which companies are influencing their markets and whether there are effects to consider on the currency exchange rates and so on. There is also, of course, the opportunity for taxation, and governments must also be aware of possible international money laundering activity. Foreign Institutional Investor is often abbreviated FII.

This foreign investment activity is different than FDI, or foreign direct investment, which is when foreign companies are branching out into a country’s market and are establishing facilities and subsidiaries with which to conduct their business. FIIs normally engage in what is known as foreign portfolio investment (FPI), which is passive investing in the stocks, bonds, and mutual funds of a country.

Passive, in this sense, refers to the fact that the interest owed is not controlling interest in the companies being invested in. If interest in a company is less than 10% ownership, it typically falls into the FPI category. Movement of portfolio interest from one country to another is sometimes called portfolio flows.

What is a Foreign Portfolio Investment (FPI)?
What is Foreign Investment Funds (FIF) tax?
What is Foreign Investment?