UPSC Prelims 2011 · Question 98 of 100
UPSC Prelims 2011 question on FDI vs FII
- ExamUPSC CSE
- Year2011
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicExternal Sector of India
- DifficultyMedium
- TypeDirect
Both Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) are related to investment in a country. Which one of the following statements best represents an important difference between the two?
Show answer
Answer: B. FII helps in increasing capital availability in general, while FDI only targets specific sectors
Verdict
Correct Answer: FII helps in increasing capital availability in general, while FDI only targets specific sectors
Analysis
FDI and FII are both forms of foreign investment, but they differ in nature, purpose and stability. FDI is direct investment in business/production, while FII is portfolio investment in financial markets.
1. FII helps bring better management skills and technology, while FDI only brings in capital — Incorrect
This is reversed.
FDI usually brings capital, technology, management skills and long-term business involvement. FII mainly brings financial capital.
2. FII helps in increasing capital availability in general, while FDI only targets specific sectors — Correct
FII increases capital availability in financial markets through investment in shares, bonds and securities.
FDI is generally directed towards specific companies, projects or sectors such as manufacturing, infrastructure or services.
3. FDI flows only into the secondary market, while FII targets primary market — Incorrect
This is incorrect.
FII generally flows into financial markets, especially secondary markets, while FDI goes into direct business activity or productive assets.
4. FII is considered to be more stable than FDI — Incorrect
FDI is more stable because it involves long-term investment and physical/business presence.
FII is more volatile and can quickly enter or exit financial markets.
Extra UPSC info
* FDI means investment with lasting interest and control in an enterprise.
* FII/FPI means investment in financial assets like shares and bonds.
* FDI is part of the capital account of Balance of Payments.
* FII/FPI is also part of the capital account but is more volatile.
* FDI supports technology transfer, employment and infrastructure creation.
* FII is often called hot money because it can move quickly across markets.
How to crack it
Option 2 is correct because FII improves general capital availability in markets, while FDI is targeted and sector/company-specific.