A Foreign Institutional Investors is an investor or investment fund which is registered in the country outside the one in which it is investing. They can be insurance companies, hedge funds, mutual funds. This term is generally used in India and it refers to outside companies investing in India.
Usually FII invests in those countries which are developing economies like India. These types of economies provide high potential growth. All of the FII’s must be registered with SEBI to invest in India.
For example:
A mutual fund in the United States sees an investment opportunity in a company of India, it can purchase the equity of that company and can take a long position.