Distinguish Between Foreign Trade and Foreign Investment | An Overview

Foreign trade and investment are vast parts of the global economy. However, many people struggle to distinguish between foreign trade and foreign investment. Although both contribute to a country’s economic growth, there are some key differences between them. In this blog, we will explain the difference between foreign trade and investment.

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What is Foreign Trade?

We need to know the meaning of both to distinguish between foreign trade and foreign investment. Foreign trade may be defined as the exchange of goods, services, or capital across international boundaries. It plays an important role in a country’s economic development. It helps increase market access, promotes good diplomatic relations, and also helps provide raw materials to countries that have them in scarcity.

Types of Foreign Trade

There are three types of foreign trade. They are listed below: 

1. Import Trade

It is the purchase of goods and services by one country from another. Thus, the goods and services flow from the selling country to the home country. Countries with a deficiency in certain goods tend to import them from another nation.

2. Export Trade

It is the selling of goods and services to another country. The goods flow from the home nation to a foreign land. Countries tend to export the goods they have in abundance. 

3. Entrepot Trade

It means importing goods from one country and exporting them to another. This form of trade is also referred to as re-export trade. 

Also Read:- Difference Between Merger and Acquisition: Key Insights for Business Growth

What is Foreign Investment?

Foreign investment refers to the allocation of capital from one country to another. Individuals, companies, and governments generally do it with the expectation of future returns. Foreign investment allows businesses and governments access to resources, technology, and skilled labour, which drives economic growth and development. 

This flow of capital is generally from one company to another in a different country. As the foreign entity gets a stake in the domestic company, it must follow the local laws and regulations regarding such investments.

Types of Foreign Investments

There are mainly three types of foreign investment, they are as follows: 

1. Foreign Direct Investment (FDI)

It refers to investment from an individual, firm or government from one country in another country (the host country). Generally, these investments are made in a company to acquire a significant stake. This investment may include obtaining a source of materials, expanding a company’s operations, or developing a multinational presence. 

2. Foreign Portfolio Investment (FPI)

It refers to purchasing and holding financial assets and securities (such as stocks and bonds) in a foreign country. Unlike FDI, it does not give the investor direct ownership of the company. The main purpose of this type of investment is to take advantage of the country's economic opportunities.

3. Foreign Indirect Investment (FII)

FII refers to third-party investments. These are generally done through intermediaries in the form of Merger and Acquisitions.  

Key Differences Between Foreign Trade and Foreign Investment

We can distinguish between foreign trade and foreign investment under the following heads:

Conclusion

To distinguish between foreign trade and foreign investment, you must understand that while both help in economic development, their functions and methods of working differ greatly. Foreign trade involves the exchange of goods and services, while foreign investments involve the acquisition of capital and ownership. In today's globalised world, countries must frame policies that encourage both foreign trade and foreign investment to ensure economic growth, stability, and healthy competition.

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