What are some examples of a Foreign Institutional Investor (FII)?

A foreign institutional investor, or FII, is a hedge fund manager, pension fund manager, mutual fund, bank, insurance firm or representative agent of these entities who is registered to invest in a foreign country. The FII takes equity positions in foreign financial markets on behalf of the entity that is based in another country.

This term is frequently used in reference to investing in emerging market economies. Direct access to the equities markets in some countries is limited and regulated. For example, foreign institutional investors seeking to invest in Indian companies must register with the Securities and Exchange Board of India, or SEBI.

Emerging markets offer significant potential for growth in the near future. This potential is attracting large numbers of investors from the United States and other countries. Many investments are made in the form of foreign institutional investments. These investments are sometimes referred to as "hot money," since they often represent substantial sums that can be withdrawn from the markets at any time, potentially increasing volatility in foreign equity markets.

In the past few decades, developing economies began to appreciate the value of, and need for, foreign investments, and made moves to provide easier access to their financial markets. Registered foreign institutional investors increased 25% between 2006 and 2007. FIIs from the United States alone have devoted nearly $10 billion to investments in foreign equities.

Foreign institutional investments have favored the banking and construction sectors, as well as information technology companies. Major multinational companies involved in foreign institutional investment include Citigroup (C), HSBC (ADR -HSBC) and Merrill Lynch (MER).