2011 GS Paper I, all questions

UPSC Prelims 2011 · GS Paper I

Question 28: Economy and Social Development

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 ?

aFII helps bring better management skills and technology, while FDI only brings in capital
bFII helps in increasing capital availability in general, while FDI only targets specific sectors
cFDI flows only into the secondary market, while FII targets primary market
dFII is considered to be more stable than FDI

AnswerThe answer is (b).

FDI is investment in a particular enterprise that gives a lasting interest and often control, so it flows into specific sectors or projects and brings technology and management skills along with money. FII, now called foreign portfolio investment, puts money into shares and bonds in the market, so it raises the availability of capital in general, but it can leave quickly. The contrast that matters here is general capital availability against sector-specific investment. FDI is the more stable of the two.

Why each option is right or wrong
  • (a) Reversed: FDI brings management skills and technology, while FII mainly brings money.
  • (b) Right: FII adds capital availability in general, while FDI goes to specific enterprises and sectors.
  • (c) Reversed: FII mainly trades in the secondary market.
  • (d) FII is volatile; FDI is the more stable.

Explanation: written by UPSC Grade, not by UPSC.

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Source: UPSC, Civil Services (Preliminary) Examination 2011, General Studies Paper I, Series A. The paper on upsc.gov.in.