Difference Between Foreign Trade And Foreign Investment

Globalization has become integral to modern life in a digitalized world. Globalization has become increasingly important when it comes to production, selling, and investing across borders.

Throughout the process of globalization, markets have been integrated across the globe and the world has become one family. Consequently, multinational corporations (MNCs) and foreign trade play a significant role in globalization.

MNCs are increasing their foreign investment through foreign trade, which is resulting in the integration of production and markets across countries as a result of increased foreign investment.

What is Foreign Trade?

Buying and selling goods and services across international borders is known as foreign trade. International trade has been enabled by globalization due to the interconnection of markets across the globe.

Despite the fact that no country has all the resources available to it, some countries have one or the other resource in abundance compared to other countries. Foreign trade is the process by which one country imports a commodity that it has in scarcity from a country that has it in excess in order to meet its needs.

Types of Foreign Trade

1. Import Trade:

The process of buying goods and services from countries other than your own. Countries with a scarcity of goods, either import them from countries with an abundance of those goods, or import raw materials to produce the final product on the ground.

1. Export Trade:

It is the sale of goods and services to foreign countries from home countries. A country exports the goods it has in abundance to the global market, thus selling those goods overseas.

1. Entrepot Trade

Essentially, it is a method of trading whereby a country buys and remodels products and services from another and then sells them elsewhere.

Foreign Investment

Investing abroad allows foreign companies and individuals to benefit from cheaper resources and a dynamic business environment in developing countries.

Foreign Investment is another form of international business. A foreign entity or individual invests in an existing business in another country or takes part in the existing business in another country through this type of investment. One of the major reasons why governments try to attract more foreign investment is to benefit from the inflow of modern technologies and resources.

Types of Foreign Investment

1. Foreign Direct Investment (FDI):

In Foreign Direct Investment, foreign companies are permitted to produce and sell directly in the home country.

Construction of their plants, the acquisition of technology, and collaborations with Indian companies are the methods by which foreign companies establish their business in India. In the case of collaboration with the home country, these companies either manage the entire business or have a say in it.

In general, the investment is made to gain a long-lasting interest in the enterprise the money is invested in. Generally, a direct investment means that the investor company controls or influences the foreign company directly.

1. Foreign Portfolio Investment:

As Foreign Portfolio Investors (FPIs), Foreign Institutional Investors are overseas companies that register in India in order to invest in Indian securities listed on exchanges and traded on those exchanges.

SEBI regulates such investments and the Reserve Bank of India maintains a ceiling on such investments.

It is very important for any economy to have foreign institutional investors. In India, there are many big companies, such as investment banks, mutual funds, etc., that invest a lot of money.

Foreign companies have a major impact on a country's economy because the market trend moves upward when they invest or purchase securities, or downward when they withdraw their investments.

Let’s understand the main difference between foreign trade and foreign investment

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Foreign Trade

Foreign Investment

Meaning

The term foreign trade refers to the purchase and sale of goods and services across borders.

Investing in developed countries is a way for foreign companies to gain access to cheap resources and a dynamic business environment.

Types

Types of foreign trade

1. Import Trade
2. Export Trade
3. Entrepot Trade

Different types of Foreign Investments

1. Foreign Direct Investment (FDI)
2. Foreign Portfolio Investment (FPI)

Movement

In foreign trade, goods can flow both in and out of countries.

The Foreign Trade industry involves the importation of modern technology and resources from other countries.

Benefits

As a result, home countries have access to international markets and can trade off resources among themselves

By bringing modern technology and resources to developing countries, it creates new investment opportunities for developed countries.

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