With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic?
Detailed Explanation:
Answer: Option 2 — It is a largely non-debt creating capital flow.
Foreign Direct Investment (FDI) is characterized as a non-debt creating capital flow because it involves equity investments and long-term stakes in enterprises, which do not require repayment like loans or bonds. Unlike debt financing, FDI brings permanent capital, technology, and management expertise without creating obligations for interest payments or principal repayment.
❌ Option 1 – Incorrect: FDI typically involves direct ownership stakes in unlisted or private companies, not merely investments through capital instruments in listed companies (which is more characteristic of FPI).
✅ Option 2 – Correct: FDI is a non-debt creating capital flow as it involves equity participation without repayment obligations, making it a stable and long-term source of foreign capital.
❌ Option 3 – Incorrect: FDI does not involve debt-servicing since it represents equity ownership rather than borrowed capital that requires interest or principal repayment.
❌ Option 4 – Incorrect: Investment by foreign institutional investors in Government securities is classified as Foreign Portfolio Investment (FPI), not FDI, as it involves short-term financial investments without control or management participation.
📝 Short Notes: Foreign Direct Investment (FDI) vs Foreign Portfolio Investment (FPI)
| Parameter | Foreign Direct Investment (FDI) | Foreign Portfolio Investment (FPI) |
|---|---|---|
| Nature | Equity participation with control/management | Investment in financial assets without control |
| Duration | Long-term investment | Short-term investment |
| Debt Creation | Non-debt creating capital flow | Non-debt creating but volatile |
| Investment Mode | Greenfield projects, M&A, equity stakes | Stocks, bonds, government securities |
| Stability | More stable and permanent | Volatile, prone to quick exit |
| Example | Setting up manufacturing plant, acquiring company shares for control | FIIs investing in stock market or G-secs |
Question 3 of 5 FDI and FPI
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