Q. With reference to the Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI), consider the following statements:
Which of the above statements is/are correct?
Q. With reference to the Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI), consider the following statements:
Which of the above statements is/are correct?
The correct option is D
3 only
Explanation: Foreign Direct Investment (FDI) refers to the investment made by the non-resident entities to carry out business operations in India with management of investment, production of goods or services, employing people and marketing their products.
Foreign Portfolio Investment (FPI) refers to the cross-border transactions and positions that involve debt or equity securities, other than those included in direct investment or reserve assets.
Statement 1 is incorrect: Unlike in the case of the External Commercial Borrowings (ECBs), the receiving country need not repay the debt in the case of FDI and FPI. They involve no payment obligation and are of non–debt creating in nature. Most developing countries prefer these investments compared to other forms of foreign capital due to their own servicing depending on the future growth of the economy.
Statement 2 is incorrect: Since FDI invests in productive assets like machines, buildings etc. of the company in which he has made the investment, it directly augments employment, output, export etc. Whereas, the FPI is invested for getting profits from shares, interests from deposits etc. it will not directly create productive asset creation.
Statement 3 is correct: In many ways FDI is said to be superior to FPI. This is because, with its productive investment, FDI is certain, non-volatile, predictable, takes production risks, and has a stabilizing impact on production.
While FII inflows depend on the return potential of the destination market and the availability of risk capital at source geographies. Further, any change in the environment in any of these will result in quick reversal of the flows. Hence FPI is known to be speculative, highly volatile and un-predictive.
3 only
Explanation: Foreign Direct Investment (FDI) refers to the investment made by the non-resident entities to carry out business operations in India with management of investment, production of goods or services, employing people and marketing their products.
Foreign Portfolio Investment (FPI) refers to the cross-border transactions and positions that involve debt or equity securities, other than those included in direct investment or reserve assets.
Statement 1 is incorrect: Unlike in the case of the External Commercial Borrowings (ECBs), the receiving country need not repay the debt in the case of FDI and FPI. They involve no payment obligation and are of non–debt creating in nature. Most developing countries prefer these investments compared to other forms of foreign capital due to their own servicing depending on the future growth of the economy.
Statement 2 is incorrect: Since FDI invests in productive assets like machines, buildings etc. of the company in which he has made the investment, it directly augments employment, output, export etc. Whereas, the FPI is invested for getting profits from shares, interests from deposits etc. it will not directly create productive asset creation.
Statement 3 is correct: In many ways FDI is said to be superior to FPI. This is because, with its productive investment, FDI is certain, non-volatile, predictable, takes production risks, and has a stabilizing impact on production.
While FII inflows depend on the return potential of the destination market and the availability of risk capital at source geographies. Further, any change in the environment in any of these will result in quick reversal of the flows. Hence FPI is known to be speculative, highly volatile and un-predictive.
