Which of the following Statements regarding Foreign Portfolio Investment is FALSE?

Solution

A foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country. Foreign portfolio investment (FPI) instead refers to investments made in securities and other financial assets issued in another country. Both methods of foreign investment are crucial to global trade and development, however FDI is often considered the preferred mode and is less volatile. FDI investors typically take controlling positions in domestic firms or joint ventures and are actively involved in their management. FPI investors, on the other hand, are generally passive investors who are not actively involved in the day-to-day operations and strategic plans of domestic companies, even if they have a controlling interest in them. FDI investors cannot easily liquidate their assets and depart from a nation, since such assets may be very large and quite illiquid. FPI investors can exit a nation literally with a few mouse clicks, as financial assets are highly liquid and widely traded. So, FPI Investments are considered as Highly Volatile Investments.