Skip to content

CMA Foundation · Fundamentals of Business Economics and Management · Economic and Business Environment

A foreign automobile company wants to set up a wholly owned plant in India and also buys 4% of the shares of an Indian listed firm through the stock exchange for short-term gains. How are these two transactions classified?

The wholly owned plant is foreign direct investment because it gives lasting interest and management control, while the 4% shareholding bought on the exchange for short-term gains is foreign portfolio investment, as it involves no control and is easily liquidated.

  1. ABoth are foreign direct investment
  2. BPlant is foreign direct investment; share purchase is foreign portfolio investmentCorrect
  3. CPlant is foreign portfolio investment; share purchase is foreign direct investment
  4. DBoth are foreign portfolio investment

Explanation

Setting up a wholly owned plant gives lasting interest and control, so it is FDI. A small 4% stake bought on an exchange for short-term returns carries no control or lasting interest and is treated as portfolio investment. Option 3 reverses the roles.

Did you get it right without looking?

One question tells you little. A timed set on Economic and Business Environment shows your real accuracy, how long you take and where you lose marks.

Practise Economic and Business EnvironmentFree diagnostic mock

More Economic and Business Environment questions