Consider the following statements:

Statement 1: Foreign Investment includes Foreign Direct Investment and Foreign Portfolio Investment.

Statement 2: Foreign Investment includes only Foreign Direct Investment.

Which of the above statement is/are correct?

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.