Question

Both Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) investment 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 capital
• B. FII helps in increasing capital availability in general, while FDI only targets specific sectors
• C. FDI flows only into secondary markets while FII targets primary markets
• D. FII is considered to be more stable than FDI

Hint:

FDI is a direct stake in a business with a management role; FII is portfolio money moving through the stock market.

Answer 1

The Correct Option is B

This question compares two ways foreign money enters a country, so it helps to first fix the plain difference: FDI buys into a business directly, FII buys shares on the stock market.

1. Option A: Claims FII brings management skill and technology. In reality that role belongs to FDI, which takes an operating stake in the company, so this option swaps the two around and is wrong.
2. Option B: FII money is spread across the market and adds to overall liquidity and capital availability, while FDI investors pick specific sectors or companies for direct investment. This lines up with how the two actually behave.
3. Option C: States that FDI stays in secondary markets and FII in primary markets, which is the reverse of reality: FII trades in the secondary market and FDI can be primary investment in a firm.
4. Option D: Claims FII is more stable, but portfolio flows are known for being volatile and quick to exit, while FDI is the stable, long-term flow.

Only option B correctly separates the two kinds of investment.

So the correct answer is option B.