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 involves goods, services, and capital between two countries. Foreign investment is an investment made in a company from a source outside the country.
How is foreign investment different from 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 relationship between foreign investment and trade? ›
The general assumption for the complementarity between FDI and trade is that both FDI and exports should move in the same direction. This means that when FDI increases, exports also increases and vice versa.
What is the difference between trade investment and other investment? ›
Investing typically involves hanging onto an asset for years, if not decades. Trading on the other hand could mean buying and selling many types of assets within the span of a day, week, or month.
What is foreign investment? ›
Foreign investment refers to the investment in domestic companies and assets of another country by a foreign investor. Large multinational corporations will seek new opportunities for economic growth by opening branches and expanding their investments in other countries.
What is the difference between international trade and investment? ›
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 an example of a foreign trade? ›
Almost every kind of product can be found in the international market, for example: food, clothes, spare parts, oil, jewellery, wine, stocks, currencies, and water. Services are also traded, such as in tourism, banking, consulting, and transportation.
What is the difference between trade and FDI? ›
This is international trade in that Chinese manufacturers expand beyond the Chinese borders, into the African markets. Foreign Direct Investment (FDI), on the other hand, is an investment(in terms of capital, technology, and/or other resources) into an existing organization of a foreign country.
Support for international trade remains robust and bipartisan. Three-quarters (74%) of Americans say trade is good for the US economy. Eight in 10 (82%) say it is good for consumers like themselves. Six in 10 (63%) say it is good for creating jobs in the United States.
What is foreign trade in economics? ›
There is not a single country in the world that produces all the products it needs. Thus, a country produces the commodity which they have a comparative advantage while importing the other commodities. This exchange of commodities by countries is considered as the foreign trade of the country.
What is an advantage of foreign trade? ›
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.
What is the main 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.
What is the difference between a trade and investment agreement? ›
Trade agreements should facilitate fair and equitable trade between the parties, while investment agreements should promote international investment.
What is the friendship between foreign trade and foreign investment? ›
All the goods that are being imported or exported by a country or an individual come under foreign trade. While on the other hand the companies or individuals that invest their capital, resources, or money in a foreign country then it's called Foreign investments.
What is the difference between foreign investment and foreign portfolio investment? ›
Foreign Direct Investment (FDI) involves foreign investors directly investing in another nation's productive assets. Conversely, Foreign Portfolio Investment (FPI) entails investing in financial assets, like stocks and bonds, of entities situated in a different country.
What is the difference between foreign direct investment and? ›
Direct investment is the purchase or acquisition of a controlling interest in a foreign business by means other than the purchase of shares. Foreign portfolio investment (FPI) is securities and other assets passively held by foreign investors, allowing individuals to invest overseas.
What is the difference between foreign investment and foreign institutional investment? ›
Foreign Direct Investment (FDI) refers to investments made by companies in foreign entities. Foreign Institutional Investment (FII) involves institutional investors investing in a country's financial market. 2. Foreign Direct Investment (FDI) injects long-term capital into the company receiving the investment.
