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HKSI PrepStudyingPaper 1
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Pacific Foods Ltd buys 40% of a Vietnamese company's voting shares and appoints two directors; a unit trust buys 0.5%. Which of the following statements are correct? I. Pacific Foods has made a direct investment. II. The unit trust has made a portfolio investment. III. Direct investment is usually easier to reverse quickly. IV. The unit trust's stake becomes direct investment if held for years.
Direct investment gives an investor a lasting interest in, and a degree of influence over, the management of an enterprise in another economy; the US Bureau of Economic Analysis applies the test of owning at least 10% of the voting securities. A 40% stake with board seats is direct investment (Statement I). A 0.5% holding gives no influence and is portfolio investment (Statement II). Statement III is reversed: listed holdings can be sold within days, while factories and controlling stakes cannot. Statement IV is wrong: the test is influence, measured by the voting stake, not the intended holding period. Source: US Bureau of Economic Analysis, Glossary: 'Direct investment' (10% voting securities criterion); ECB, Balance of payments (financial account components) (as at October 2026).
Classifying by holding period. A long-term passive holding of 0.5% is still portfolio investment; influence (10% or more of the vote) makes it direct.
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