UPSC Prelims 2011 Q28: Indian Economy – External Sector & Balance Of Payments
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?
- (a) FII helps bring better management skills and technology, while FDI only brings in capital
- (b) FII helps in increasing capital availability in general, while FDI only targets specific sectors
- (c) FDI flows only into the secondary market, while FII targets primary market
- (d) FII is considered to be more stable than FDI
Answer: (b) FII helps in increasing capital availability in general, while FDI only targets specific sectors
Explanation
FDI vs FII: the key difference
Both bring foreign money into a country, but in very different ways.
| Option | Verdict | Reason |
|---|---|---|
| (a) FII brings management/technology, FDI only brings capital | Incorrect | This reverses the real difference: FDI, not FII, brings management and technology along with capital |
| (b) FII increases capital availability in general, FDI targets specific sectors | Correct | FII flows into stock/bond markets broadly, raising capital availability generally; FDI goes into specific businesses/sectors with a long-term stake |
| (c) FDI flows only into the secondary market, FII into the primary market | Incorrect | This is backwards: FII mostly trades in the secondary market (shares/bonds already issued); FDI is a direct, often primary, stake in a business |
| (d) FII is more stable than FDI | Incorrect | It is the opposite: FDI is long-term and stable; FII ('hot money') can exit quickly |
FDI vs FII at a glance:
| Point | FDI | FII |
|---|---|---|
| Nature | Direct stake in a business, control/management involved | Portfolio investment in shares/bonds |
| Stability | Long-term, stable | Short-term, volatile ('hot money') |
| Brings | Capital + technology + management | Only capital |
Answer: (b) FII helps in increasing capital availability in general, while FDI only targets specific sectors.
Why each option is right or wrong
- (a) Incorrect. This reverses the roles; it is FDI, not FII, that brings management skills and technology.
- (b) CORRECT. FII adds general capital availability; FDI is sector/business-specific.
- (c) Incorrect. The market types are reversed; FII is mostly secondary-market, FDI is a direct stake.
- (d) Incorrect. FDI is the more stable of the two; FII can withdraw rapidly.
Key point
FDI: long-term stake in a specific business/sector, brings capital + management + technology. FII: portfolio investment across the market generally, mostly in the secondary market, more volatile ('hot money').
Remember
FDI: stable, sector-specific. FII: volatile, market-wide capital.
Common mistakes
- Swapping which investment type brings technology and management (it is FDI).
- Reversing which type is more stable (FDI, not FII).
- Confusing primary and secondary market roles of the two.
Exam tip
FDI = direct, sticky, sector-specific. FII = portfolio, mobile, market-wide. Any option reversing these pairs is wrong.
Sources
- Department of Industrial Policy and Promotion, Ministry of Commerce and Industry — Consolidated FDI Policy Circular of 2011
- Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995