FDI FII FPI MCQ Quiz - Objective Question with Answer for FDI FII FPI - Download Free PDF

The correct answer is Option 1 (Statement 1 only).

Key Points

• Foreign Investment comprises both Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI).
• Foreign Direct Investment (FDI) refers to investments made by a foreign entity directly into the business operations or physical assets of another country.
• Foreign Portfolio Investment (FPI) involves investment in financial assets such as stocks, bonds, or other securities in a foreign country, without taking control of the business.
• Statement 1 is correct because it acknowledges that foreign investment includes both FDI and FPI.
• Statement 2 is incorrect as it excludes FPI, which is an integral part of foreign investment.

Additional Information

• Foreign Direct Investment (FDI):
  • FDI typically provides long-term capital and technical expertise to the host country.
  • It often involves establishing businesses, acquiring stakes in enterprises, or building infrastructure.
  • FDI is regulated by the government of the host country and is subject to specific laws and policies.
• Foreign Portfolio Investment (FPI):
  • FPI consists of passive holdings of financial securities, like stocks and bonds, in a foreign country.
  • Unlike FDI, FPI does not provide the investor with direct control over business operations.
  • It is considered more volatile as it is influenced by changes in market conditions.
• Key Differences between FDI and FPI:
  • FDI involves direct control or significant influence over the business, whereas FPI is purely financial investment without control.
  • FDI is generally more stable and long-term, while FPI can be speculative and short-term.
• Importance of Foreign Investment:
  • It helps in economic growth, job creation, and technology transfer in the host country.
  • It contributes to the development of infrastructure and industrialization.
  • It also plays a role in stabilizing foreign exchange reserves.

The correct answer is 0.74.

Key Points

• 74% Foreign Direct Investment (FDI) is allowed in the defence sector under the automatic route in India.
• FDI beyond 74% is permitted but requires government approval, subject to access to modern technology or for other reasons.
• The decision to increase FDI in the defence sector was made to attract investment and boost the Make in India initiative in defence manufacturing.
• The relaxation in FDI norms aims to facilitate the establishment of joint ventures, encourage technology transfer, and strengthen India's defence capabilities.
• This policy helps enhance self-reliance and reduces dependency on defence imports, promoting India as a global defence manufacturing hub.

Additional Information

• Automatic Route:
  • Under the automatic route, foreign investors do not need prior approval from the government or the Reserve Bank of India (RBI) to invest in specified sectors.
  • This is intended to simplify the investment process and attract more foreign capital to India.
• Defence Production Policy:
  • The Defence Production and Export Promotion Policy (DPEPP) 2020 aims to achieve a turnover of ₹1.75 lakh crore (US$25 billion) in defence manufacturing by 2025.
  • It focuses on achieving self-reliance through indigenization and promoting export-oriented defence production.
• Make in India Initiative:
  • Launched in 2014, this initiative seeks to transform India into a global manufacturing hub.
  • It emphasizes reducing imports and promoting indigenous production in key sectors, including defence, electronics, and automobiles.
• FDI in Critical Sectors:
  • In addition to defence, FDI is permitted in sectors like telecommunications, pharmaceuticals, and aviation to boost investment and growth.
  • Each sector has specific caps and conditions for FDI, depending on its strategic importance.

The correct answer is option 2.

• Row 1 is incorrect: Foreign Portfolio Investment (FPI) refers to investments in financial assets like stocks, bonds, or mutual funds. However, negotiable financial instruments representing shares of a foreign company traded on a local exchange are called Depository Receipts (DRs), not FPIs.
• Row 2 is correct: Foreign Direct Investment (FDI) involves investment by a foreign entity in a domestic company, where the investor gains ownership and operational control. FDI is typically long-term and involves direct participation in business activities.
• Row 3 is correct: Participatory Notes (P-Notes) are instruments that allow foreign investors to invest in Indian securities without directly registering with SEBI. They are issued by SEBI-registered Foreign Institutional Investors (FIIs) to overseas investors.

Key Features of FPI and FDI:

Additional Information

• Foreign Portfolio Investment (FPI):
  • Short-term investment focused on financial assets.
  • FPIs do not grant control over businesses and are often subject to market fluctuations.
  • Example: Mutual funds investing in Indian stocks.
• Foreign Direct Investment (FDI):
  • Involves direct ownership and long-term participation.
  • For listed companies: FDI occurs when investment is 10% or more of paid-up capital.
  • For unlisted companies: Any investment is considered FDI.
  • Example: A foreign company setting up a manufacturing unit in India.
• Participatory Notes (P-Notes):
  • Issued by SEBI-registered Foreign Institutional Investors (FIIs).
  • Used by overseas investors who do not want to register with SEBI.
  • High risk due to anonymity, which raises concerns about money laundering.

Since Row 1 is incorrect and Rows 2 & 3 are correct, the correct answer is option 2 (Only two rows are correct).

The Correct answer is 10 Percent.

Key Points

• The Organisation for Economic Cooperation and Development (OECD) sets guidelines and standards for international economic activities.
• According to the OECD, an investment is classified as a Foreign Direct Investment (FDI) when an investor acquires a stake of 10 percent or more in a foreign enterprise.
• This threshold is used to ensure that the investor has significant influence or control over the management of the enterprise.
• FDI is a crucial component for the growth and development of the host country's economy, often bringing in capital, technology, and expertise.
• The 10 percent threshold helps distinguish between a direct investment, which implies a lasting interest, and portfolio investment, which is more of a speculative nature.

 Additional Information

• Organisation for Economic Cooperation and Development (OECD)
  • The OECD is an international organisation that works to build better policies for better lives.
  • It provides a forum in which governments can work together to share experiences and seek solutions to common problems.
  • The OECD's mission is to promote policies that will improve the economic and social well-being of people around the world.
  • The organisation was founded in 1961 and has 38 member countries.

The correct answer is FII.

Key PointsPortfolio Investment - Investments made as part of a portfolio are those made in a variety of assets rather than just one (stock, debt, mutual funds, derivatives, or even bitcoins), with the goal of generating returns that are in line with the investor's risk tolerance.

Important Points FII - Foreign institutional investors(FII) 

• Companies with headquarters outside of India are known as foreign institutional investors (FIIs), and they propose investments there. They significantly affect a nation's economy.
• Institutional investors include, but are not limited to, hedge funds, mutual funds, pension funds, insurance bonds, high-value debentures, and investment banks.
• Only through the nation's portfolio investment scheme are FIIs permitted to invest in India's primary and secondary capital markets.
• Through this programme, FIIs are able to buy Indian company shares and debentures on the national stock exchange.
• Thus, the portfolio investment by foreign institutional investors is called FII(foreign institutional investors).

The correct answer is Department for Promotion of Industry and Internal Trade.

Key Points

• Department for Promotion of Industry and Internal Trade is the nodal department for the formulation of the policy on Foreign Direct Investment (FDI).
  • It is a central government department under the Ministry of Commerce and Industry.
  • It controls the maintenance and management of data on inward FDI into India.
  • The Department for Promotion of Industry and Internal Trade plays a vital role in the liberalization and rationalization of the FDI policy.

 Additional Information

The correct answer is the Balance of Trade of Invisible Items

Key Points

• Balance Of Payment (BOP) is a statement that records all the monetary transactions made between residents of a country and the rest of the world during any given period. This statement includes all the transactions made by/to individuals, corporates and the government and helps in monitoring the flow of funds to develop the economy.

• The current account monitors the inflow and outflow of goods and services between countries. This account covers all the receipts and payments made with respect to raw materials and manufactured goods.

• There are various categories of trade and transfers which happen across countries.

• It could be visible or invisible trading, unilateral transfers or other payments/receipts. Trading in goods between countries is referred to as visible items, and import/export of services (banking, information technology etc.) are referred to as invisible items.

Important Points

• Piyush Goyal announced on a social platform on 15th July 2020 that India had recorded a trade surplus in June for the first time in last 18 years.

The correct answer is Foreign Direct Investment.

Key Points

• FDI Stands for Foreign Direct Investment.
• It is an investment made by a firm or individual in one country into business interests located in another country.
• However, FID's are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies.
• It plays an important role in the economic development of a country. 
• There are 3 types of FDI:
  • Horizontal FDI
  • Vertical FDI
  • Conglomerate FDI
• Horizontal FDI: 
  • It is where funds are invested abroad in the same industry.
  • In other words, a business invests in a foreign firm that produces similar goods.
  • For example, a US-based firm may purchase Puma, a Germany-based firm.
  • They are both in the industry of sportswear and therefore would be classified as a form of horizontal FDI.
• Vertical FDI:-
  • Vertical FDI is where an investment is made within the supply chain, but not directly in the same industry.
  • In other words, a business invests in a foreign firm that it may supply or sell too. For example, Hershey's, a US Manufacturer may look to invest in cocoa products in Brazil.
  • This is known as backward vertical integration because the firm is purchasing a supplier, or potential supplier, in the supply chain.
• Conglomerate FDI:
  • It is where an investment is made in a completely different industry. In other words, it is not linked in any direct way to the investor's business.
  • For Example, Walmart, a US retailer, may invest in BMW, a German automobile manufacturer.

Important Points

• Advantages of FDI:
  • Boost to International Trade.
  • Reduced Regional and Global Tensions
  • Sharing of Technology, Knowledge, and Culture.
  • Diversification
  • Lower Costs and increased efficiencies
  • Tax Incentives
  • Employment and Economic Boost
• Disadvantages of FDI:
  • Foreign Control
  • Loss of Domestic Jobs
  • Risk of Political or Economic Change

The correct answer is Option 1.

THIS QUESTION HAS BEEN DELETED BY THE UPSC.

Key PointsTight monetary Policy

• Tight monetary policy refers to the actions that a central bank takes to limit inflation and an overheating economy. Tight monetary policy is commonly called contractionary monetary policy.
• Tight monetary policy, or contractionary monetary policy, typically occurs when a central bank wants to keep inflation under control.
• If there has been too much spending and borrowing by consumers and businesses, the economy can become overheated and that could considerably raise the price level of goods and services.
• Inflation is the rise in the price level of items, such as groceries or clothes, over time.
• To minimize or slow down inflation, a central bank could make it more expensive for consumers to spend money and businesses to borrow money by raising interest rates. This is a form of contractionary monetary policy—it restricts, or contracts, spending.

The correct answer is Option 4.

Key Points

• Foreign direct investment (FDI)
  • It is an investment made by a firm or individual in one country into business interests located in another country.
  • FDI is different from foreign portfolio investment where the foreign entity merely buys equity shares of a company.
  • The following include FDIs-
    • Subsidiaries of foreign companies in India.
    • Majority of foreign equity holding in Indian companies.
    • Day to Day operations of the company.
    • It is a major source of nondebt financial resources.
    • Companies are exclusively financed by foreign companies.
  • Therefore, A foreign entity setting up an educational institution in India is FDI. Hence, Option 4 is correct.
  • There are a few industries where FDI is strictly prohibited under any route. These industries are
    • Atomic Energy Generation
    • Any Gambling or Betting businesses
    • Lotteries (online, private, government, etc)
    • Investment in Chit Funds
    • Nidhi Company
    • Agricultural or Plantation Activities
    • Trading in TDRs
    • Cigars, Cigarettes, or any related tobacco industry 

The correct answer is FDI.

Key Points

• Foreign direct investment(FDI):
  • Foreign direct investment(FDI) refers to a situation where a foreign entity obtains ownership or control rights over the shares of a company in a country or establishes a company in that country.
  • Foreign direct investment(FDI) is not only an inflow of capital but also an inflow of technology, knowledge, skills.
  • It is the main source of non-debt financial resources for the economic development of a country.
  • Foreign direct investment tends to take place in economies with growth prospects and skilled labor.

Additional Information

• Foreign Exchange(Forex):
  • ​Foreign exchange reserves are assets held by a country's central bank or monetary authority.
  • It is usually held in a reserve currency (usually the U.S. dollar) and to a lesser extent the Euro, Japanese Yen, and British Pound.
  • It is used to support your liabilities, such as the issued local currency and the deposit reserves of financial institutions or governments at the central bank.
  • Benefits of Foreign Institutional Investors (FII):
    • These investors generally prefer equity over debt. So this will also help maintain and even improve the capital structures of the companies they are investing in.
    • They have a positive effect on the competition in the financial markets
      FII help with the financial innovation of capital markets.
    • These institutions are professionally managed by asset managers and analysts. They generally improve the capital markets of the country.
• Cash Reserve Ratio(CRR):
  • ​The Cash Reserve Ratio (CRR) is a specific part of the total deposits held by commercial banks as reserves and applied by the Reserve Bank of India (RBI).
  • This specific amount is held as a reserve in the form of cash or cash equivalents, stored in the bank vault, or sent to the Reserve Bank of India. CRR ensures that the bank will not run out of money.
• Special Economic Zone(SEZ):
  • ​Special Economic Zone is an enclave of a country region. The region is usually tax-free and has different commercial and commercial laws, mainly to encourage investment and create jobs.
  • In addition to creating jobs and promoting investment, special economic zones have also been created to better manage these areas, thus increasing the convenience of doing business.

• Measures of Expansionary policy and Contractionary Policy:

The correct answer is Foreign investment.

Key Points

• Worldwide investment in multinational companies (MNC) is called foreign investment.
  • It is an investment made by a company or individual from one country to the business of another country.
  • It is also called foreign direct investment.
  • It is an important factor in economic growth in the country.
  • In Foreign direct investment, a foreign entity acquires shares or ownership in the company and can influence day-to-day businesses and operations.
  • It is not an only inflow of money but also technology, skills and expertise.
  • It is one of the major ways of capital transfer internationally and how well it is working will depend upon the host country’s system and infrastructure.
• FDI in India improved after the LPG reforms of 1991.
• The government opened the economy for investment and improved FDI norms.

Additional Information

The correct answer is Disinvestment.

Key Points

• Selling off a part of the equity of a Public Sector Enterprise (PSE) to the public is called Disinvestment.
• Disinvestment means the sale or liquidation of assets by the government, usually Central and state public sector enterprises, projects, or other fixed assets.
• The government undertakes disinvestment to reduce the fiscal burden on the exchequer, or to raise money for meeting specific needs, such as to bridge the revenue shortfall from other regular sources.
• Funds from disinvestment would also help in reducing public debt and bring down the debt-to-GDP ratio while competitive public undertakings would be enabled to function effectively.

Additional Information

The correct answer is Internationalization Theory

Key Points

1. Perfect Market Hypothesis:

• It states that share prices reflect all information.
• It hypothesizes that stocks trade at their fair market value on exchanges.
• Proponents posit that investors benefit from investing in a low-cost, passive portfolio.
• Opponents believe that it is possible to beat the market and that stocks can deviate from their fair market values.

2. Strategic Linkage Theory:

• Strategic linkage simply refers to linking objectives, often implemented in the form of projects to your strategy.
• There can be many levels of strategic linkage.

3. Transaction Cost Theory

• Transaction cost theory is an alternative variant of the agency's understanding of governance assumptions.
• It describes governance frameworks as being based on the net effects of internal and external transactions, rather than as contractual relationships outside the firm (i.e. with shareholders).

4. Internationalization Theory

• Internalization theory suggests that gains from FDI modes of foreign expansion would be higher relative to non-FDI modes.
• The theory of internalization has come under increased criticism on the premise that there are agency costs to internalization that may be higher than costs of non-equity forms of international.

Therefore, the correct answer is Internationalization Theory

The correct answer is 100%.

Key Points

• At present 100% foreign direct investment is allowed in railway infrastructure.
• The 100% FDI in railway infrastructure will be cleared through an automatic route without approval from the Foreign Investment Promotion Board.
• A foreign investor can invest up to 100% in most segments of rail infrastructure such as locomotive and rolling stock and dedicated freight lines, suburban rail, metro rail, Passenger terminals, Railway electrification, etc.

Additional Information