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 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 foreign investment and foreign trade? ›
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 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 trade and foreign aid? ›
Efficient use of scarce resources- trade allows countries to specialize and focus scarce resources on producing goods and services they have absolute and comparative advantages. Maintain dignity- aid leads to dependence on a foreign country, compromising the sovereignty of a nation.
What is the difference between foreign direct investment and investment? ›
Foreign direct investment is building or purchasing businesses and their associated infrastructure in a foreign country. Direct investment is seen as a long-term investment in the country's economy, while portfolio investment can be viewed as a short-term move to make money.
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 does foreign trade do? ›
International trade allows countries to expand their markets and access goods and services that otherwise may not have been available domestically. As a result of international trade, the market is more competitive. This can ultimately result in more competitive pricing and cheaper products.
What are the characteristics of foreign trade? ›
Essential characteristics of foreign trade
Exchange of different goods and services. Necessary regulations and measures. Currency flow reflected in the exchange rate. Encourage the production of a country.
International trade often acts as an incentive for nations to improve their transportation and communication with other countries to facilitate the continuous exchange of goods and services. Improved relations – International trade between nations also leads to a greater scope of communication between the two nations.
Is foreign trade good or bad? ›
Three-quarters (74%) say that international trade is good for the US economy, including 64 percent of Republicans, 83 percent of Democrats, and 73 percent of Independents. This is virtually unchanged from 2021 when it was 75 percent but is down from a high of 87 percent in 2019.
What is the difference between foreign aid and investment? ›
The aim of foreign aid is to help a country in need by offering it assistance in solving its problems and fulfilling its needs. Foreign investment is where one country will make investments in another country with the main aim of making profits.
What is the main difference between investment and foreign investment? ›
The money that is spent to buy assets such as land building machines etc. is called investment whereas investment made by a MNC to buy such assets is called foreign investment.
What is an example of foreign investment? ›
Foreign direct investments are commonly categorized as horizontal, vertical, or conglomerate. With a horizontal FDI, a company establishes the same type of business operation in a foreign country as it operates in its home country. A U.S.-based cellphone provider buying a chain of phone stores in China is an example.
What are the disadvantages of foreign investment? ›
FDI may decline in response to a downturn in the world economy, which could impact the host nation's stability. FDI can put host nations at risk for political instability. Foreign investors may experience uncertainty due to changes in government policy or unfavorable political environments.
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 are considered foreign investments? ›
Foreign direct investments (FDIs) are the physical investments and purchases made by a company in a foreign country, typically by opening plants and buying buildings, machines, factories, and other equipment in the foreign country.
What is the difference between foreign investment and foreign institutional investment? ›
Foreign Direct Investment (FDI) involves long-term investments in physical assets, contributing to economic development and job creation. Foreign Institutional Investor (FII) represents short-term investments in financial markets, focused on earning financial returns and portfolio diversification.
