RAS question
FDI (Foreign Direct Investment) differs from FPI (Foreign Portfolio Investment) because:
Correct answer: (D) FDI involves lasting interest and significant control in the enterprise, while FPI is passive investment.
FDI involves a lasting interest and significant influence or control in an enterprise, while FPI is a passive investment in financial assets without day-to-day managerial control.
Explanation
FDI differs from FPI in the investor's relationship with the enterprise. The IMF explains that portfolio investment means buying stocks or bonds, often for short-term financial gain, without becoming actively involved in day-to-day management. Direct investment, by contrast, is a long-haul, hands-on investment in an enterprise in another economy, made with the objective of gaining control or exerting significant influence over management; this usually involves at least 10 percent of a company's stock. That is why FDI is associated with lasting interest, management influence and greater stability, while FPI remains a more passive holding of financial assets that can be sold quickly.
Why the other options are wrong
- (A) This reverses the usual distinction: FDI is treated as long-term and more stable, while FPI is relatively short-term and easier to exit.
- (B) The distinction is not based on whether the investor is government or private; both FDI and FPI can be undertaken by private entities.
- (C) This reverses the instruments: FPI is investment in stocks, bonds and other financial assets, while FDI can involve factories or other enterprise-level assets.
Concept
This tests the balance-of-payments distinction between direct investment and portfolio investment. It recurs in RAS because capital flows, external-sector stability and investment policy are standard economy themes.