Difference Between Foreign Trade and Foreign Investment
The key difference between foreign trade and foreign investment is that foreign trade is between two or more countries, while foreign investment is made by a particular organization or individual in another country. The article discusses the concept of foreign trade and investment and covers the difference between foreign trade and foreign investment.
Comparison Table – Foreign Trade vs Foreign Investment
| Basis for Comparison | Foreign trade | Foreign investment |
|---|---|---|
| Definition | 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. |
| Need | resource endowment | capital requirement |
| Result | Integration of markets from different countries. | Additional investment in the form of capital, technology, and other resources. |
| Advantage | It creates an opportunity for producers to cover international markets. | Provides long-term capital to the company. |
| Goal | To make a profit and stand out in the global market. | To generate long-term returns. |
What is Foreign Trade?
Foreign trade is an act of marketing products and services in international markets. It facilitates the availability of goods in the country’s market, different from where it is produced. It increases the choice of goods since the prices of similar goods are almost equal. Therefore, producers compete with each other.
Foreign trade is necessary for a country to meet its resource requirements, which means that trade between two countries occurs because neither country is self-sufficient. Therefore, to fulfil its requirement for natural or man-made resources, it engages in trade with the country that possesses these abundant resources. Also, countries rich in certain minerals or other items find it beneficial to export them to other countries.
Characteristics of Foreign Trade
- Open Economy: Nations engage in mutual agreements that provide for the movement of goods and services across their borders. It helps reduce trade barriers and enhances cooperation in the economic sphere.
- Foreign Currency Flow: When countries trade, they exchange currencies. The exchange rate determines the currencies' worth during transactions if the currencies have different values.
- Customs Regulations: Customs authorities oversee the import and export of goods. They are also responsible for ensuring that the entire transactions comply with laws and applying necessary taxes or duties. They also monitor trade regulations to prevent illegal transactions.
- Trade Agreements: To facilitate cross-border trade, countries sign agreements that ease the process of exchange, lower tariffs, and set standard policies for trade.
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What is Foreign Investment?
Foreign investment means the investment made by foreign nationals or foreign companies in a substantial proportion in the domestic company, in the sense that they own extensive ownership and control the company’s management.
In short, foreign investment introduces foreign capital into a company based in a different country. So, it results in the movement of capital from one country to another. It can be in the form of the following:
- Foreign Direct Investment: Investment from a source outside the nation in the production or business of a company.
- Foreign Portfolio Investment: Investment of the foreign company in the stock market of another country.
- Foreign Institutional Investment: It involves an investment of foreign investors in the passive holdings of the company, which operates in a different country.
Characteristics of Foreign Investment
Foreign investment refers to the inflow of money from one country to another for business, infrastructure, or asset purchases. It shares several features with foreign trade:
- Cross-Border Transactions: Just as foreign trade, foreign investment also involves the flow of capital from one country to another.
- Foreign Exchange Impact: Investment in a foreign country requires currency conversion based on the exchange rate.
- Government Regulations: Like customs regulate trade, governments have policies regulating foreign investments to stabilize the economy.
- International Agreements: Many countries sign investment agreements to encourage and protect foreign investors, just like trade agreements facilitate smooth commerce.
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Difference Between Foreign Trade And Foreign Investment
The main difference between foreign trade and foreign investment is that foreign trade involves the movement of goods. In contrast, foreign investment involves earning profit based solely on monetary transactions.
International trade is a global thing that all open economies are a part of. It is often used to name a part of the economy. For example: “International trade offers many business opportunities.” or “International trade encourages competition.”
On the other hand, foreign trade is a much narrower concept. It is usually used to mention a country’s transactions with the rest of the world. To name a country’s trade abroad, said with the words that form part of the concept.
For example: “If country X wants to grow, the government must change foreign trade policy.” or “The depreciation of the exchange rate of country X has boosted foreign trade.”
Furthermore, another critical difference between foreign trade and investment is that foreign trade involves the purchase and sale of goods and the movement of goods. Foreign investment is specifically related to foreign exchange and equity investments.
The difference is based on the fact that while the State or the Government carries out foreign trade, international trade is carried out by companies, individuals, or institutions.
Conclusion
Foreign trade and investment are a profit impulse, either through the entry or exit of goods or capital investment.
Foreign trade provides the opportunity to enter the global market and reach places that value goods and productions. The result is better income and the creation of a niche in the market.
A foreign investment benefits from having rights and decision-making power over the shares of a company that is not part of the legislation of its country. Each country has laws; foreign investors seek better long-term generated monetary returns, whether legal or commercial.
We hope you now know how to distinguish between foreign trade and foreign investment.
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FAQs
Why governments try to attract more foreign investment?
Foreign investments are crucial for any country's economy since the foreign money adds to the nation's economy, thereby boosting it. Also, more investment results in a better lifestyle, higher consumer spending, more job opportunities, and maintains good relations with other countries.
What is the liberalization of foreign trade?
Trade liberalization means eliminating or reducing the different restrictions in the free exchange of goods and services between two countries. This process includes reducing or eliminating processes such as surcharges and tariffs imposed by the government and eliminating non-tariff barriers such as quotas, licenses, etc.
What is a trade barrier?
Trade barriers are the restrictions imposed by the government to reduce the rate of trade between the two nations. Usually, this is done to slow down and safeguard the fate of local distributors, manufacturers, and sellers. The types of trade barriers are tariff, quota, and non-tariff.
Is FDI good for developing countries?
Various theories on the internet published by various economic forums have concluded that foreign direct investment is a positive boost for the developing country's economy. They increase money flow in a developing country and help create more job opportunities.
What are the disadvantages of foreign direct investment?
There are many disadvantages to foreign direct investment, some of which are as follows: a) It acts as an obstacle to national investments. b) It has a negative impact on the country's investment. c) The negative impact on exchange rates. d) The risk of significant political changes.
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