Globalization has bought great changes in the markets of world over the last few years. It has made trade among different countries very fast, effective, and efficient. The two positive changes as a result of globalization are foreign trade and foreign investment. In this article, we will understand the complete difference between both these terminologies. The content of the blog is as follows.
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Definition Of Foreign Trade
Foreign trade refers to the act of trade/exchange of goods, services, and capital between two or more countries of the world. It facilitates the availability of goods or raw materials in a country that either does not have them or has a shortage of them. It helps a country to fulfill its resource requirements. Moreover, foreign trade takes place because no country is self-sufficient in the terms of natural and man-made resources, so it is prudent to approach other countries that have them in massive quantities.
Types Of Foreign Trade
The three main types of foreign trade are.
- Import Trade- It refers to the purchase of goods and services from one country to another country. This means that import trade is actually the flow of goods and services from another land to the homeland(nation).
- Export Trade- It refers to the selling of goods and services from a home country to another country.
- Entrepot Trade- It refers to the form of foreign trade in which a country buy goods and services from one country, reprocess those goods, and then sell them to another country.
Definition Of Foreign Investment
Foreign investment refers to the investment made by individuals/institutions in another country. It helps to connect markets of different countries across the globe. A foreign investor gets a stake in the domestic company and so, he has to follow all the rules and policies of the local government regarding investments. The three main types of foreign investments are as follows.
- Foreign Direct Investment- This type of investment refers to the investment from a foreign company into another country’s production or business.
- Foreign Portfolio Investment- The investment made by a foreign company, in the securities market of another country is called a foreign portfolio investment.
- Foreign Institutional Investment- It refers to investment by foreign companies in the passive holdings of the company, that operates in a different country.
Foreign Trade Vs Foreign Investment(Comparison Table)
| Basis For Difference | Foreign Trade | Foreign Investment |
| Definition | It refers to the trade/exchange of goods and services between two countries. | It refers to the investment made by a foreign entity into another entity/business based in a different country. |
| Objective | Its main purpose is to gain profit and excel global market. | Its main objective is to make returns in a long-run |
| Advantage | It creates an opportunity for the manufacturers to cover the international markets. | It brings long-term capital to a company via foreign investors. |
| Result | The amalgamation of markets of different countries. | Additional investment in the form of capital, technology, and other resources to the market. |
Key Differences Between Foreign Trade And Foreign Investment
The key differences between foreign trade and foreign investments are discussed as follows.
- Foreign trade refers to the act of trade/exchange of goods, services, and capital between two or more countries of the world. On the other hand, Foreign investment refers to the investment made by individuals/institutions in another country. It helps to connect markets of different countries across the globe.
- Foreign trade focuses on gaining profits by entering the international market via the import mechanism. On the other hand, foreign investment focuses on gaining long-term self-generated capital returns.
- While foreign trade connects various types of markets of different countries around the globe, foreign investment brings additional investment to the business entity in the form of capital, technology, or anything that resonates with the continuous fast-tracked globalization.
- Foreign trade creates an opportunity for local manufacturers to enter the global market and increase their reach. On the other hand, foreign investment brings long-term capital to the company, and that too in foreign currency.
Conclusion
So, with the above discussions and explanations, we can conclude that both foreign trade and foreign investment act as a catalyst in increasing a country’s Gross Domestic Product (GDP) and become an important source for economic development. Foreign trade refers to the act of trade/exchange of goods, services, and capital between two or more countries of the world. On the other hand, Foreign investment refers to the investment made by individuals/institutions in another country. It helps to connect markets of different countries across the globe.
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