Final answer:
It is true that firms may take steps to reduce the risk of investing in foreign countries by encouraging long-term investments over short-term speculative ones, among other strategies.
Step-by-step explanation:
Firms may take steps to reduce the risk of investing in foreign countries. This statement is true. To mitigate the volatility of foreign investment and safeguard their economy, nations may implement various measures. These can include the accumulation of large reserves of foreign exchange by central banks and increased regulation of domestic banks to prevent reckless lending practices. Additionally, strategies may be put in place to discourage short-term, speculative capital inflows, in favor of medium to long-term investment commitments. This approach aims to make the country less vulnerable to the fluctuations of global investor sentiment.
Foreign direct investment (FDI) is a key aspect of this strategy as it involves a more long-term and stable commitment to the host country's economy. It often comes with managerial responsibility and is less liquid compared to portfolio investments, which can be withdrawn much more quickly and easily. By promoting FDI over volatile portfolio investments, countries can encourage more stable economic growth and become less susceptible to rapid capital exit.