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Foreign Trade and Foreign Investment

Globalization has changed the markets across the world in past few years. It has brought many positive changes that have made the trade among countries very easy and effective. Foreign trade and foreign investment are the two such positive changes as a result of globalization. Let us see how they differ from each other!

Foreign Trade:

Foreign trade refers to the trade between two or more countries. In other words, it is the act of trading products and services in the international markets. It connects the markets of different countries across the world. It generally involves exchange of goods, services and capital of one country with another country. Foreign trade facilitates the availability of goods, which are produced in a different country, in the domestic market of a country, e.g. toys made in china are sold in the shops of your city. Thus, it helps provide a wide range of products and services in the domestic market. It also has a significant contribution to the gross domestic product (GDP) of a country.

Foreign trade can be of three types:

  • Import trade: When goods or services are purchased by a country from another country, in other words, flow of goods from a foreign country to the home country.
  • Export trade: When one country sells goods or services to another country, in other words, it is the outflow of goods or services from one country to another country.
  • Entrepot trade: It is also known as re-export. In this type of foreign trade, the goods are purchased from one country and then after some processing sold to another country.

Foreign Investment:

Foreign investment refers to the investment made by a company or organization in another country. In foreign investment, a company usually establishes manufacturing unit, sales and marketing offices etc, in another country. Thus, it is a huge investment made by a foreign company in another country to set up its offices or branches to grow its business. In simple words, foreign investment is the introduction of foreign capital from one country to a company based in another country. Thus, it helps move capital from one country to another country. It can occur in three different forms such as:

  • Foreign Direct Investment: It is the investment made by foreign company into the production or business of a company based in another country.
  • Foreign Portfolio Investment: It is the investment made by a foreign company in the stock market of another country.
  • Foreign Institutional Investment: It is the investment made by a foreign company in the passive holdings of a company based in another country.

Some of the key differences between foreign trade and foreign investment based on the above information are as follows:

Foreign Trade Foreign Investment
It refers to the trading of products and services in the international market. The products or services of one country are exchanged with products or services of another country. It refers to the investment made by a foreign company in a company based in another country.
It connects the markets of the different worlds. It results in investment in the form of capital, technology and other resources.
It allows manufacturers to sell their products in the overseas markets and thus to cover the international markets. It helps move capital from one country to another country.
It gives emphasis on earning profit and entering the global markets. Its main objective is to generate income for a long-term.
It consists of imports, exports and entrepot. Its types include foreign direct investment, foreign portfolio investment, and foreign institutional investment.
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