economics medium MCQ

What is the fundamental difference between Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII/FPI)?

  1. FDI is short-term and highly volatile, while FII is long-term and stable
  2. FDI involves acquiring a lasting interest and control in an enterprise, while FII is purely portfolio investment in financial assets without management control
  3. FDI is restricted to the manufacturing sector, while FII is restricted to the agricultural sector
  4. FDI requires RBI approval, while FII requires only SEBI approval

Answer: FDI involves acquiring a lasting interest and control in an enterprise, while FII is purely portfolio investment in financial assets without management control

FDI is driven by strategic, long-term interests where the foreign investor seeks to influence or manage the business operations, often bringing technology and managerial expertise. FII (or FPI) is driven by short-to-medium-term financial returns; investors buy stocks or bonds in the secondary market and can quickly pull their money out ('hot money') if market conditions change, making FII much more volatile than FDI.

Topic International Economics - BOP
Exam Relevance UPSC Prelims, SSC CGL, Banking
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