Which of the following is a way governments can increase the attractiveness of foreign direct investment (FDI) and licensing compared to exporting?

• A. Imposing stricter regulations on domestic firms
• B. Reducing tariffs and import quotas on foreign goods
• C. Increasing transportation costs for exported goods
• D. Offering tax incentives and subsidies to foreign investors

Answer: (D)

Verified step by step guidance

1. Understand the context: Foreign Direct Investment (FDI) and licensing are alternative ways for firms to enter foreign markets compared to exporting. Governments want to make these options more attractive to encourage investment and technology transfer.
2. Analyze the options given: Imposing stricter regulations on domestic firms generally discourages business activity and is unlikely to attract foreign investors.
3. Consider the impact of reducing tariffs and import quotas on foreign goods: This makes importing easier and cheaper, which may encourage exporting but does not directly incentivize FDI or licensing.
4. Evaluate increasing transportation costs for exported goods: Higher transportation costs make exporting less attractive, which might indirectly encourage FDI or licensing, but this is a negative and inefficient policy.
5. Recognize that offering tax incentives and subsidies to foreign investors directly lowers the cost and risk of investing abroad, making FDI and licensing more attractive compared to exporting.