RAS question
Foreign Direct Investment (FDI) differs from Foreign Portfolio Investment (FPI) because FDI involves:
Correct answer: (C) A lasting management interest (10% or more equity stake).
Foreign Direct Investment differs from Foreign Portfolio Investment because it creates a lasting management interest, normally marked by ownership of 10 percent or more of the ordinary shares or voting power in a foreign enterprise.
Explanation
FDI is not just foreign money entering a company; it is an investment relationship. The IMF explains direct investment as a resident entity in one economy acquiring a lasting interest in an enterprise resident in another economy, with a long-term relationship and significant influence over management. For classification, the direct investment enterprise is one in which the direct investor owns 10 percent or more of ordinary shares or voting power, or the equivalent in an unincorporated enterprise. That is why option C is right. FPI, by contrast, fits the passive side of the question: investment in stocks or bonds without management control, where the investor is mainly concerned with return and value appreciation.
Why the other options are wrong
- (A) Short-term investment in stocks and bonds points to portfolio investment, where the investor does not exercise significant influence over management.
- (B) Buying government bonds is a debt-security investment, not a lasting ownership relationship with influence over an enterprise's management.
- (D) Government-to-government lending is lending between public authorities, whereas FDI is defined by an investor's lasting interest in a foreign enterprise.
Concept
This tests the Indian Economy concept of classifying foreign investment by the investor's relationship with the enterprise. The key exam hook is the 10 percent threshold, which separates direct investment from portfolio equity in balance-of-payments classification.