If a home country wants to limit outward foreign direct investment (FDI) flow, which policy should the country implement?

• A. Provide tax incentives for domestic firms to invest overseas
• B. Impose capital controls restricting the transfer of funds abroad
• C. Reduce tariffs on imported goods
• D. Subsidize foreign companies entering the home market

Answer: (B)

Verified step by step guidance

1. Understand the goal: The home country wants to limit outward foreign direct investment (FDI), meaning it wants to reduce the amount of domestic capital flowing to foreign countries for investment purposes.
2. Analyze each policy option in terms of its effect on outward FDI: For example, providing tax incentives for domestic firms to invest overseas would encourage more outward FDI, which is the opposite of the goal.
3. Consider the role of capital controls: Capital controls are government-imposed restrictions on the movement of funds across borders. Imposing such controls can directly limit the ability of firms to transfer money abroad for investment, thus effectively limiting outward FDI.
4. Evaluate other options: Reducing tariffs on imported goods affects trade flows but does not directly restrict capital movement or investment abroad. Subsidizing foreign companies entering the home market encourages inward investment, not limiting outward FDI.
5. Conclude that the policy which directly restricts the transfer of funds abroad (capital controls) is the most effective way to limit outward FDI.