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Which of the following statements is correct about the Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI)?
- a)Foreign investment greater than 10 percent of the paid-up capital of a company can be considered as the FDI.
- b)FDI is more liquid asset for an investor than FPI.
- c)FPI investors are active investors and take controlling positions in domestic firms.
- d)All the statements (a), (b) and (c) are correct.
Correct answer is option 'A'. Can you explain this answer?
Verified Answer
Which of the following statements is correct about the Foreign Direct ...
- According to IMF and OECD definitions, the acquisition of at least ten percent of the ordinary shares or voting power in a public or private enterprise by non-resident investors makes it eligible to be categorized as a foreign direct investment (FDI). In India, a particular FII is allowed to invest up to 10% of the paid-up capital of a company, which implies that any investment above 10% will be construed as FDI, though officially such a definition did not exist. It may be noted that there is no minimum amount of capital to be brought in by the foreign direct investor to get the same categorized as FDI. Hence option (a) is the correct answer.
- FDI investors cannot easily liquidate their assets and depart from a nation, since such assets may be very large and quite illiquid. FPI investors can exit a nation literally with a few mouse clicks, as financial assets are highly liquid and widely traded.
- FDI can be used to develop infrastructure, set up manufacturing facilities and service hubs, and invest in other productive assets such as machinery and equipment, which contributes to economic growth and stimulates employment. FDI is obviously the route preferred by most nations for attracting foreign investment since it is much more stable than FPI and signals long-lasting commitment.
- FDI investors typically take controlling positions in domestic firms or joint ventures and are actively involved in their management. FPI investors, on the other hand, are generally passive investors who are not actively involved in the day-to-day operations and strategic plans of domestic companies, even if they have a controlling interest in them.
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Which of the following statements is correct about the Foreign Direct ...
Understanding FDI and FPI
Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are two crucial components of international finance, each serving distinct purposes and exhibiting different characteristics.
Foreign Direct Investment (FDI)
- FDI involves investing directly in a foreign business or acquiring a significant stake in it.
- A common benchmark is that foreign investment exceeding 10% of a company's paid-up capital qualifies as FDI.
- This threshold indicates a level of influence or control over the business, distinguishing it from passive investments.
Foreign Portfolio Investment (FPI)
- FPI refers to investments in financial assets such as stocks and bonds in a foreign country.
- These are usually smaller stakes, less than 10%, and do not confer significant control over the companies.
- FPI investors are typically passive investors, focusing on capital appreciation rather than exerting control.
Key Differences
- Liquidity: FPI is generally more liquid than FDI, as portfolio investments can be easily bought and sold on financial markets. In contrast, FDI involves significant time and effort to manage.
- Investor Control: FPI investors do not take controlling positions, unlike FDI investors, who aim for a substantial influence in the company.
Conclusion
In summary, statement (a) is accurate regarding FDI. Statements (b) and (c) are incorrect because FDI is not more liquid than FPI, and FPI investors are not typically active investors seeking control. Therefore, the correct answer is option 'A'.
Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are two crucial components of international finance, each serving distinct purposes and exhibiting different characteristics.
Foreign Direct Investment (FDI)
- FDI involves investing directly in a foreign business or acquiring a significant stake in it.
- A common benchmark is that foreign investment exceeding 10% of a company's paid-up capital qualifies as FDI.
- This threshold indicates a level of influence or control over the business, distinguishing it from passive investments.
Foreign Portfolio Investment (FPI)
- FPI refers to investments in financial assets such as stocks and bonds in a foreign country.
- These are usually smaller stakes, less than 10%, and do not confer significant control over the companies.
- FPI investors are typically passive investors, focusing on capital appreciation rather than exerting control.
Key Differences
- Liquidity: FPI is generally more liquid than FDI, as portfolio investments can be easily bought and sold on financial markets. In contrast, FDI involves significant time and effort to manage.
- Investor Control: FPI investors do not take controlling positions, unlike FDI investors, who aim for a substantial influence in the company.
Conclusion
In summary, statement (a) is accurate regarding FDI. Statements (b) and (c) are incorrect because FDI is not more liquid than FPI, and FPI investors are not typically active investors seeking control. Therefore, the correct answer is option 'A'.
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Which of the following statements is correct about the Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI)?a)Foreign investment greater than 10 percent of the paid-up capital of a company can be considered as the FDI.b)FDI is more liquid asset for an investor than FPI.c)FPI investors are active investors and take controlling positions in domestic firms.d)All the statements (a), (b) and (c) are correct.Correct answer is option 'A'. Can you explain this answer?
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Which of the following statements is correct about the Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI)?a)Foreign investment greater than 10 percent of the paid-up capital of a company can be considered as the FDI.b)FDI is more liquid asset for an investor than FPI.c)FPI investors are active investors and take controlling positions in domestic firms.d)All the statements (a), (b) and (c) are correct.Correct answer is option 'A'. Can you explain this answer? for UPSC 2025 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Which of the following statements is correct about the Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI)?a)Foreign investment greater than 10 percent of the paid-up capital of a company can be considered as the FDI.b)FDI is more liquid asset for an investor than FPI.c)FPI investors are active investors and take controlling positions in domestic firms.d)All the statements (a), (b) and (c) are correct.Correct answer is option 'A'. Can you explain this answer? covers all topics & solutions for UPSC 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Which of the following statements is correct about the Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI)?a)Foreign investment greater than 10 percent of the paid-up capital of a company can be considered as the FDI.b)FDI is more liquid asset for an investor than FPI.c)FPI investors are active investors and take controlling positions in domestic firms.d)All the statements (a), (b) and (c) are correct.Correct answer is option 'A'. Can you explain this answer?.
Which of the following statements is correct about the Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI)?a)Foreign investment greater than 10 percent of the paid-up capital of a company can be considered as the FDI.b)FDI is more liquid asset for an investor than FPI.c)FPI investors are active investors and take controlling positions in domestic firms.d)All the statements (a), (b) and (c) are correct.Correct answer is option 'A'. Can you explain this answer? for UPSC 2025 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Which of the following statements is correct about the Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI)?a)Foreign investment greater than 10 percent of the paid-up capital of a company can be considered as the FDI.b)FDI is more liquid asset for an investor than FPI.c)FPI investors are active investors and take controlling positions in domestic firms.d)All the statements (a), (b) and (c) are correct.Correct answer is option 'A'. Can you explain this answer? covers all topics & solutions for UPSC 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Which of the following statements is correct about the Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI)?a)Foreign investment greater than 10 percent of the paid-up capital of a company can be considered as the FDI.b)FDI is more liquid asset for an investor than FPI.c)FPI investors are active investors and take controlling positions in domestic firms.d)All the statements (a), (b) and (c) are correct.Correct answer is option 'A'. Can you explain this answer?.
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