The biggest difference between foreign direct investment, or FDI, and a foreign institutional investor, or FII, is that FDI is the parent company making an investment in a foreign nation, and an FII is a person for the company making investments in a foreign nation's markets. Of course, there are many other differences, but they are minute and specified according to the company or individual investor.
FDI is generally more preferred compared to FII since it is considered more beneficial to the entire economy, versus FII which really only benefits the company investing and the market receiving the funds. Direct investments are made to generally increase production of a products in a specific market, as made by FDI. In the instance of FII, these investments are pooled into a secondary market, not really funding anyone or anything, just products in general.
FDI is a medium to long-term investment option for specific companies, and FII is a short term investment solution for the money market. FII can include hedge funds, insurance companies, mutual funds and pension funds. FII, being short term, has more risks associated with the investments and is typically placed in international stock markets. As far as different types of financial inflows to many underdeveloped countries, FDI and FII have both played a large part in helping third world countries become more interdependent with the global economy by boosting their specific economies and improving their living conditions.