Foreign Trade
Foreign Trade is the exchange of goods and services between two countries in the international market. It helps in the availability of raw material/finished product in a country that either does not have it or has it in scarcity. No country is self-sufficient in terms of natural or man-made resources,, so it is prudent to approach other countries that have them in abundance.
Types of Foreign Trade
There are three different types of foreign trade, which are as follows:
- Import trade: It is the purchase of goods and services by one country from another country. Here the flow of goods is from a foreign land to the home nation. Countries import goods and services when they need raw materials for producing goods or when they need a finished product for domestic consumption.
- Export trade: It is the selling of goods and services to another country. Here the flow of goods is from the home nation to a foreign land. Countries export goods and services to another nation when they have that particular commodity in abundance.
- Entrepot trade: This process is also called re-export. In this form of trade, a business purchases goods or services from one country, reprocesses those products, and then sells them to another country.
Benefits of Foreign Trade:
Foreign Trade has many benefits for all the countries involved in it. Some of the advantages of exchanging goods in the international market are as follows:
- Foreign Exchange: Foreign Trade helps countries get access to foreign currency and boost up their reserves. This currency is essential when it comes to paying for imports of goods and services.
- Consumers get more options: People from one country enjoy superior quality goods and services from other nations. They would not have gained access to these products were it not for International trade. These products can also help them improve their standard of living in the long run.
- Optimum use of a nation’s resources: No country can fulfil all its consumption needs independently. They have to depend on other nations for specific products. International trade allows them to procure raw materials/finished products that they don’t have. It helps countries focus on producing what they are good at and help increase efficiency in the production process of those products.
- Economic Benefits: International trade generates employment opportunities for organisations and countries involved in the export/entrepot of goods and services. It also helps to improve the Gross Domestic Product for that country.
Foreign Investment
Foreign Investment is the inflow of capital into a country through individuals/institutions from a different country. The flow of capital is from one organisation, with its headquarters in a foreign nation, into another company that belongs to the home nation. The investment helps companies based abroad to set up their offices or manufacturing units in another country. Since the foreign entity gets a stake in the domestic company in exchange for providing capital, they have to follow local government rules and regulations regarding such investments.
Types of Foreign Investment
There are three different ways in which a company belonging to one country can invest in another country. These methods of investment are as follows:
- Foreign Direct Investment: This type of investment involves a foreign company infusing capital into another country’s business or production units.
- Foreign Portfolio Investment: When an organisation based outside the country invests in the securities market of that country, it becomes a foreign portfolio investment.
- Foreign Institutional Investment: This is a form of investment by a foreign-based company in the passive holdings of an entity in another country.
Benefits of Foreign Investment
The main advantages of foreign investment are as follows:
- Economic growth: Infusion of foreign capital helps domestic companies increase production and generate employment. It can also boost consumption in the market since the workforce in those companies will have greater purchasing power. It contributes to the overall growth of a country’s economy.
- Resource transfer: Foreign investment brings capital and helps the domestic workforce get access to new technologies and skills. It will help in improving their productivity while also developing the quality of goods and services produced.
- Cost benefits: Foreign investment can help domestic companies improve production efficiency and reduce costs via access to better technologies.
Differences between Foreign Trade and Foreign Investment
The main differences between Foreign Trade and Foreign Investment are as follows:
Foreign Trade | Foreign Investment |
Meaning |
It involves the exchange of goods and services between two countries in the international market. | It involves the investment made by a foreign company into another company based in a different country. |
Purpose |
The main purpose of foreign trade is as follows: - To help countries access goods and services that they need from international markets.
- To sell their products in those markets and earn foreign exchange.
| The primary purpose of foreign investment is as follows: - Gain access into the market of another country by providing capital and getting a stakeholding in a local company.
- Use that access to conduct business and make profits.
|
Benefit |
Access to international markets for domestic companies. | Access to long term capital to a company via foreign investors. |
Flow of resources |
Foreign trade enables both inflow and outflow of raw materials/finished products between countries. | The foreign investment enables the inflow of capital and technologies into a country from abroad. |
Types |
The three types of foreign trade are as follows: | The three types of foreign investment are as follows: - Foreign Direct Investment
- Foreign Portfolio Investment
- Foreign Institutional Investment
|
Conclusion
There are important differences between Foreign Trade and Foreign Investment, but both are essential to improve the economy of a country. A country needs to use both these economic tools to their advantage.
Also See
- Difference between internal trade and external trade
- Difference between investment and foreign investment
FAQs
Foreign trade enables both inflow and outflow of raw materials/finished products between countries. The foreign investment enables the inflow of capital and technologies into a country from abroad.
What is the difference between foreign trade and foreign investment? ›
Foreign trade involves goods, services, and capital between two countries. Foreign investment is an investment made in a company from a source outside the country. Integration of markets from different countries. Additional investment in the form of capital, technology, and other resources.
What is the difference between trade and foreign trade? ›
Home Trade occurs within one country, while Foreign Trade involves transactions between multiple countries. Other distinctions include transportation costs, documentation requirements, time gaps in transfer and payment, and the importance of credit scores.
What is the difference between foreign direct investment and foreign investment? ›
In summary, FDI represents a more substantial and enduring investment with a higher level of control, while FPI involves shorter-term investments in financial assets without seeking significant influence over the companies invested in.
What is the relationship between foreign investment and trade? ›
On the other hand, FDI and trade can be seen as complementary since investing abroad leads to greater competitiveness in foreign markets, and trade in intermediate goods (inputs) and complementary final products to the affiliate.
What is different between trade and investment? ›
The difference is in the timeline. Stock trading is about buying and selling shares for short-term profit, such as within a week or a day. Investing refers to buying and selling stocks for long-term gains, such as within months or years.
What is an example of a foreign trade? ›
International trade is referred to as the exchange or trade of goods and services between different nations. This kind of trade contributes and increases the world economy. The most commonly traded commodities are television sets, clothes, machinery, capital goods, food, raw material, etc.
What is international trade and investment? ›
International trade and investment are key factors in the development and growth of economies around the world. They influence the interactions between countries, the transfer of resources and technologies, and the shaping of the global economic order.
What is the difference between foreign aid and foreign investment? ›
Foreign aid is provided to help a country in need by offering funding to solve its problems and fulfill its needs while foreign. investment is made one country or company makes investments in another country with the goal of making a profit.
Is there any difference between trade and trading? ›
Trade is a primary economic concept which involves buying and selling of commodities and services, along with a compensation paid by a buyer to a seller. In another case, trading can be an exchange of commodities/services between parties. Trade can occur between producers and consumers within an economy.
An example would be McDonald's investing in an Asian country to increase the number of stores in the region. Here, a business enters a foreign economy to strengthen a part of its supply chain without changing its business in any way.
What are different foreign investment? ›
Foreign investment is generally classified in two ways: direct and indirect. Direct describes long-term significant investments such as the acquisition of plants and buildings. At the same time, indirect usually refers to investors buying shares in foreign companies that trade on a foreign stock exchange.
How is foreign investment different from it? ›
Investment is total amount of money spent by a shareholder in buying shares of a company. Foreign investment involves capital flows from one country to another, granting extensive ownership stakes in domestic companies and assets.
What are the two differences between foreign trade and foreign investment? ›
Foreign trade refers to the buying and selling of goods and services between countries. Foreign investment refers to the purchase of assets, such as stocks and real estate, in a foreign country by an individual or business.
What is the difference between international trade and foreign trade? ›
The difference between international trade and foreign trade lies in the breadth of both concepts and their geographical scope. International trade refers to the trade of all goods and services worldwide while foreign trade refers fundamentally to the transactions of a country with the rest of the world.
What is the difference between FDI and international trade? ›
Inter- national trade is basically the exchange of goods and services across international borders [Rugman, Collinson, Hodgets, 2006], and FDI has been defined as 'the flow of funding provided by an investor or a lender (usually a firm) to establish or acquire a foreign company or to expand or finance an existing ...
What is meant by foreign investment? ›
Foreign investment is when a domestic investor decides to purchase ownership of an asset in a foreign country. It involves cash flows moving from one country to another to execute the transaction. If the ownership stake is large enough, the foreign investor may be able to influence the entity's business strategy.
What is the difference between trade and foreign aid? ›
Aid is often FOCUSSED on target groups and problems – often the poorest people in society and improving their lives. On the other hand, trade is less efficient as it is profit driven and the benefit of trade is mostly confined within elite group of people of the country.
