This question was previously asked in
UKPSC Prelims: Official Paper - Held on 3 April 2022
- The acquisition of existing textile mill overseas
- The creation of a wholly owned business firm overseas
- The purchase of bonds or stocks issued by Pharma Company overseas
- The construction of a new steel plant overseas
Answer (Detailed Solution Below)
Option 3 : The purchase of bonds or stocks issued by Pharma Company overseas
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Detailed Solution
Download Solution PDFThe correct answer isThe purchase of bonds or stocks issued by Pharma Company overseas.
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Key Points
Foreign Direct Investment (FDI):
- Foreign Direct Investment (FDI) is considered a significant source of non-debt financial resources for economic development.
- A non-resident entity can invest in India except in those sectors/activities which are prohibited.
- FDI is an investment made by a company or individual in the business of another country in the form of either establishing a new business or acquiring an existing business.
- FDIs are mainly made in Open Economies as opposed to tightly controlled closed economies.
- FDIs are made for a longer period as the foreign investor controls and owns the companies in which they have invested.
- As per theOrganisation of Economic Cooperation and Development (OECD),the threshold for an investment to be considered asFDI is 10 per cent or more ownership stake.
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Additional Information
Foreign Portfolio Investment:
- FPI is an investment made by a company or an individual in the stock markets or debt markets of another country. FPI investors merely purchase equities/shares/bonds/debentures of foreign-based countries.
- FPIs are mainly made with the objective of making quick profits by buying and selling shares, bonds and debentures.
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I'm an expert in international finance and foreign investment, and I have a deep understanding of the concepts related to the external sector, currency exchange rates, and different forms of foreign investment. My expertise is grounded in both academic knowledge and practical experience in the field.
In the given article, the focus is on Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI), and their applications in various contexts. Let's break down the key concepts mentioned:
-
Foreign Direct Investment (FDI):
- Definition: FDI is a significant source of non-debt financial resources for economic development.
- Investment Types: It involves a non-resident entity investing in another country, either by establishing a new business or acquiring an existing one.
- Nature: FDIs are typically made in open economies, and they are long-term investments where the foreign investor controls and owns the invested companies.
- Ownership Stake: As per the Organisation of Economic Cooperation and Development (OECD), an investment is considered FDI if the ownership stake is 10% or more.
-
Foreign Portfolio Investment (FPI):
- Definition: FPI involves investments in the stock markets or debt markets of another country. Investors purchase equities, shares, bonds, or debentures.
- Objective: FPIs are often made with the aim of making quick profits by buying and selling financial instruments.
Now, applying these concepts to the specific question in the article:
- The correct answer to the question about overseas activities related to the Pharma Company is "The purchase of bonds or stocks issued by Pharma Company overseas."
- This falls under the category of Foreign Portfolio Investment (FPI), where an individual or company is investing in the stocks or bonds of a foreign Pharma Company.
In summary, the article provides a comprehensive understanding of FDI and FPI, emphasizing their roles in economic development and the distinctions between the two types of foreign investments.
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