Prelims 2020

Q. With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic?

a) It is the investment through capital instruments essentially in a listed company.
b) It is a largely non-debt creating capital flow.
c) It is the investment which involves debt-servicing.
d) It is the investment made by foreign institutional investors in the Government securities.
Correct Answer : b) It is a largely non-debt creating capital flow.

Question from UPSC Prelims 2020 GS Paper

Explanation:

Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) refers to the investment made by a company or individual in one country in business interests in another country, in the form of either establishing business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company.

Characteristics of FDI

The major characteristic of FDI that sets it apart from other forms of international investment is that it is a largely non-debt creating capital flow. This means that unlike loans, bonds, or other forms of financial investment that require the borrower to make regular interest payments and eventually repay the principal amount (thus creating a debt obligation), FDI does not primarily involve borrowing money that needs to be repaid.

Instead, it represents an investment in the form of equity stakes, where the foreign investor becomes a part-owner of the business and earns returns in the form of profits, dividends, or appreciation of the investment value. This characteristic of FDI is beneficial for the host country as it does not increase the country’s external debt and interest liabilities, and it often brings additional benefits such as technology transfer, management know-how, and job creation.

Why the other options are incorrect:

a) “It is the investment through capital instruments essentially in a listed company.” – This statement is more aligned with portfolio investments rather than FDI. FDI can be made in both listed and unlisted companies and does not necessarily involve capital instruments in the stock market.

c) “It is the investment which involves debt-servicing.” – This is incorrect as FDI, by its nature, is equity-based and does not involve debt-servicing like loans or bonds.

d) “It is the investment made by foreign institutional investors in the Government securities.” – This describes foreign portfolio investment rather than FDI. Foreign institutional investors buying government securities is a form of portfolio investment, not direct investment in the productive capacity of another country.

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