Foreign Trade vs Foreign Investment
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.
The key difference between foreign trade and foreign investment lies in the fact that trade involves the movement of goods while the 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 (in Tabular Form)
|Parameters of Comparison||Foreign Trade||Foreign Investment|
|Objective||Profit-driven||Long Term Return|
|Advantage||International markets||Long term capital for a company|
|Intention||Endowments of Resources||Requirement of capital|
|Result||An amalgamation of various markets||Additional 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
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.
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.
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.
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.
How to Remember the Difference Between Foreign Trade and Foreign Investment
Time Needed : 2 minutes
Remembering the differences is very simple, just follow our mind mapping guide given below:
- Associate the first word with a thing or item which you see daily
For e.g.: Middle line in letter H for Horizontal
- Associate the second word with a thing or item which you see daily
For e.g.: The two lines in letter V for Vertical
- Recall the two words daily two times
During morning and evening bring up the two words in front of you and then recall the things that you had associated with each word.
- Repeat for 7 days
Repeating this process for a week will help you remember the difference between words for a long time
Frequently Asked Questions (FAQ) About Foreign Trade and Foreign Investment
- Why do governments try to attract more foreign investment?
The government tries to get in more foreign investments. This is huge because of the fact that the outside money will add to the nation’s economy and the economy will further get boosted up.
Also, more investment will result in a better lifestyle, increased consumer spending, more job opportunities and maintains good relationships with the other country.
- What do you understand by the Liberalization of foreign trade?
The term trade liberalization basically means to remove or to reduce the different restrictions that are present in the process of free exchange of goods and services between two countries.
This process basically includes the reduction or the removal of the processes such as surcharges, duties levied by the government and also the removal of nontariff hurdles like quotas, licensing, etc.
- What is meant by the trade barrier?
Trade barriers are basically the restrictions that are imposed by the government so as to reduce the trade rate between the two nations.
This is usually done to slow the pace and to safeguard the fate of the local dealers, manufacturers, and vendors. Types of trade barriers are tariffs, quotas, and non-tariffs.
- Is FDI good for developing countries?
From various theories available on the internet published by various economic forums, it has been concluded that the foreign direct investments act as a positive boost for the developing country’s economy.
They increase the flow of money in the developing country and also helps in generating more job opportunities for the people.
- How can I invest in developing countries?
There are various ways of investing in a developing country.
Some are as follows:
You can purchase residential buildings which you can further put on a lease, you can also purchase commercial rental real estate that yields.
You can also buy and invest in the local stocks and also you can invest in the small but growing companies which have a promising future.
- What are the disadvantages of foreign direct investment?
There are a lot of disadvantages for foreign direct investment.
Some of the main ones are as follows:
a) Acts as a hindrance for the domestic investments
b) Gives a negative impact on the country’s investment
c) The negative impact on the exchange rates
d) The risk that there will be major political changes
e) Tackling the modern-day colonialism.
- How does foreign trade affect economic growth?
With the foreign trade coming into the picture, the investments go higher, which results in the increase in job opportunities, which further results in increased spending and consumption from the user’s end.
All this will further attract more FDI into the country and again the cycle will repeat itself which will further provide more strength to the nation’s economy.
Learn More With the Help of Videos
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.
Word Cloud for Difference Between Foreign Trade and Foreign Investment
The following is a collection of the most used terms in this article on Competitive Advantage and Core Competence. This should help in recalling related terms as used in this article at a later stage for you.