Since both terms are similar, people are often unable to differentiate between them properly. Nevertheless, FDI and FII are completely different of meaning and functionality.
FDI stands for Foreign Direct Investment whereas FII stands for Foreign Institutional Investor. As the name implies, FDI is concerned with investing money in a foreign nation, where an individual or a group is allowed to start a business of their own and enjoy the privileges and liberties that are provided to foreign investors. In contrast, FII is concerned with investing in the stock market of foreign nations.
Here, an individual investor or a group of investors can invest in a foreign market, but for this, they would have to get registered in the stock market of that country.
Similarly, having the liberty to invest in the stock market of a foreign nation, the FII is more flexible, having the ability to invest and pull out money as seen fit. When it comes to FDIs however, once you have invested your money, it is stuck for a much longer time and you will have to go through all the legal processes to liquefy your investment.
A typical example of FII and FDI is that the former is concerned with investment in stocks while the latter is like starting a business in a foreign country. FDI not only requires huge investment and know-how of the legalities but it also requires extensive market research and evaluation of the available resources.
FDI is also more focused on locating a particular business opportunity and investing in it so the potential sector can flourish. Unarguably, this increases employment opportunities and increases competition in the market, whereas FII is mainly concerned with making huge returns and that too with the means of investing in the stock exchange.