Q. 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? (UPSC Prelims 2011)
Answer:
FII helps in increasing capital availability in general, while FDI only targets specific sectors
Notes: Statement [A] is Incorrect: It is actually FDI (Foreign Direct Investment) that brings in better management skills, technology, and operational expertise because the investor takes a direct role in the company. FII (Foreign Institutional Investment) is mostly "portfolio investment" and only brings in capital.Statement [B] is Correct (Least incorrect): FII (Foreign Institutional Investment) is essentially "market liquidity." It flows into the stock and bond markets, increasing the general availability of capital for any listed company. FDI (Foreign Direct Investment) is a "partnership." It usually targets a specific company or a specific project (like building a factory or starting a retail chain). However, FDI does not "only" target specific sectors; it is a long-term investment in the physical assets of a company. Statement [C] is Incorrect: It is the opposite. FII flows primarily into the secondary market (buying existing shares on the stock exchange), whereas FDI often involves the primary market (new ventures, startups, or direct acquisitions).Statement [D] is Incorrect: In economics, FDI is considered much more stable than FII.