Difference Between Foreign Trade and Foreign Investment (With Table)

A trade between two or more countries that connects their various markets is called foreign trade. An investment made by an organization or a particular individual in some other country is called as foreign investment.

Foreign Trade vs Foreign Investment

The difference between foreign trade and foreign investment is that trade involves the movement of goods while investment involves an objective to earn profits based on only monetary transactions. The prominent difference is that foreign trade deals with goods while foreign trade deals with capital. By capital, it means monetary underpinnings.

Also, another key difference between foreign trade and foreign investment is that foreign investment also involves the buying and selling of the goods along with the movement of goods.

The foreign investment is specifically related to ‘A’ particular business model, currency exchange and capital investments.

Comparison Table Between Foreign Trade and Foreign Investment

Parameters of ComparisonForeign TradeForeign Investment
ObjectiveProfit-drivenLong Term Return
AdvantageInternational marketsLong term capital for a company
IntentionEndowments of ResourcesRequirement of capital
ResultAn amalgamation of various marketsAdditional investment to the market

What is Foreign Trade?

Trades are either done within a state, city, province, countries or between two or more countries. In the inflow of goods in a country is called import and the outflow of goods to other countries is called export.

Foreign trade creates opportunities for the producer of goods to reach out beyond their own markets. Technically, foreign trade involves reach out to foreign markets only.

Also, because the foreign goods enter the local markets, the local products too have to equalize their rates to be in the market which gives a tough competition to the local vendors and the exporters. It is often assumed that foreign products are better than domestic ones. But this may or may not be true.

What is Foreign Investment?

Foreign investment involves the monetary handling of machinery, buildings, properties, etc which is a kind of investment done by a person or multinational companies outside the home country. This is done by purchasing some shares of a company to get a profit out of it or pooling in their own money and taking rights are a part of the company in a foreign land.

To make it simple, foreign investment is the inflow of monetary capitals (not goods) and funds. As understood that due to foreign trade practices, the local producers to indulge in investing their money in the foreign market.

The investment is either done in monetary terms, investment, share purchase or a contractual bond.

Main Differences Between Foreign Trade and Foreign Investment

Objective

The main objective of foreign trade is to ensure they gain profits by entering the international market through the import mechanism. The foreign investment seeps into the objective of gaining long term self-generated capital returns.

The foreign investment returns could include taking a stake in a company based in a different country.

The other objective is that foreign trade connects the markets of two or many geographically apart countries of the world through a given exchange of goods.

In contrast to foreign trade, foreign investment engages in further investment other than the goods only. The investment to or in the company is executed in the form of any technology, provision of resources or direct involvement of money.

Advantage

The advantage of foreign trade is that it connects various types of markets specific to different countries that are marked on the globe.

On the other end of the spectrum, foreign investment calls out to engage in additional investment. This additional investment can be anything that resonates with the constant fast-tracked globalization.

Now, every country does not necessarily possess or create all the types of resources and hence foreign trade is required to fill in the needs of demand of any particular resource.

Let’s say that the foreign trade fills in the deficient gaps of supply in a country. The foreign investment deals with fulfilling the capital requirement of other companies.

Meaning, the money, and funds investing in a local company are brought about from a source that is from another market/nation.

Intention

The intention is directly related to the wants of people and organizations. The intention of foreign trade is to quest the resource needs, requirements demand through trade taking place in order to address the gaps of demand.

For example, the UAE doesn’t grow its own vegetables.

The onions are imported from Karnataka, rice from Kerela, pulses from Maharashtra, etc. It can also be said that the foreign trade addressed ‘human-made’ needs while foreign investment deals with ‘human-want’ needs.

The intention of foreign investment is nested by foreign nations or out of country organizations to gain a percentage benefit in the profit of another countries business model. That means that they want the control, semi ownership and have a say in the management of that particular organization.

Result

As per the understanding through the objectives, advantages, and intention is that both the markets are profit drive; be it through goods inflow or outflow or capital investment.

 Foreign trade gives an opportunity to enter the global market and reach out to the places that would value goods and produces. The result is better income and creating a niche in the market.

A foreign investment gets a benefit to holding right and has a deciding power in the stakes of a company which is not a part of their country law. As every country has its own laws; be it legal or business, the foreign investors look at better long-term generated monetary returns.

Conclusion

In order to increase the country’s GDP i.e. gross domestic product, both foreign trade and foreign investments act as a catalyst to economic development.

But, both being aware of the fact that the country’s social, economic, political scenario may see a change; it is important to be knowledgeable about a few aspects.

Being aware of the fluctuating interest rates, currency value, investment options, stock market, trade agreements, sales, and manufacturing operations by wearing the lens of a global approach is an important parameter to be mindful about.

References

  1. https://www.jstor.org/stable/1924829
  2. https://siepr.stanford.edu/sites/default/files/publications/302wp.pdf