Question

What two measures can countries employ to restrict foreign direct investment? (Check all that apply.)

a) Tariff reductions
b) Import quotas
c) Investment incentives
d) Capital controls

Answer 1

To restrict foreign direct investment, countries can implement import quotas and capital controls. Import quotas limit the quantity of goods that can be imported, while capital controls restrict financial transactions with foreign entities. These tools are used to control short-term speculative inflows and encourage medium-to-long-term investments.

Step-by-step explanation:

Countries can employ several measures to restrict foreign direct investment. Two prominent tools that are employed to control or reduce the inflow of foreign capital, particularly when aiming to discourage speculative short-term capital inflows, are import quotas and capital controls.

Import quotas directly limit the quantity of goods that can be imported into a country, affecting the investment associated with those goods. Capital controls, on the other hand, are regulatory measures that restrict or prohibit certain kinds of financial transactions that involve foreign entities. These can range from limits on the transfer of funds abroad to restrictions on foreign entities purchasing domestic assets, thus reducing direct investment from overseas.

Tariff reductions and investment incentives, conversely, are typically used to encourage foreign direct investment rather than restrict it. Hence, they are not correct measures for the intention of constraining direct investment.