Capital control limits the free movement of capital across national borders. There is consensus among economists that capital controls, like quotas and tariffs on goods, inherently limit economic progress and efficiency because they prevent productive resources from being used where they are most needed. As a result, capital controls had been gradually phased out in developed countries during the 1970s and 1980s. By the 1990s, there was substantial pressure on developing countries to remove their capital controls, too. Capital controls had almost been relegated to a curiosity. However, several recent developments have rekindled interest in the use and study of capital controls. First, liberalisation of financial systems by allowing free convertibility of national currencies and trends towards integration of capital markets in the world economy created new problems for policy makers. Second, several currency and financial crises during the 1990s, for example, the Asian financial crisis of 1997-98, the Mexican crisis of 1994, and the European Monetary System crises of 1992-93, focused world attention on the asset transactions that precipitated these crises.
[1] Foreign direct investment is the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital.
[2] Restrictions on capital movements have two broad forms. Administrative or direct capital controls are outright prohibitions on or an approval procedure on cross-border capital transactions. Market-based or indirect capital controls attempt to discourage particular capital movements by making them more costly. Examples include explicit or implicit taxation of cross-border capital flows and dual or multiple exchange rates.