Difference and Relationship Between Foreign Trade and Foreign Investment

Trading and investing are two different things that people usually consider a single thing. Trading simple means buying or selling particular stuff while on the other hand, investing means putting your money in someone’s else business or holding and seeking profit from his/her’s profit. So, Foreign Trade and Foreign investment simply mean doing or expanding your business overseas. All the goods that are being imported or exported by a country or an individual come under foreign trade. While on the other hand the companies or individuals that invest their capital, resources, or money in a foreign country then it’s called Foreign investments. Both foreign trade and foreign investment are equally important for the development of a nation.

What is Foreign trade?

Foreign trade simply means doing a business or trading in another country from the one you are staying in. Trading simply means buying and selling goods as discussed above and if this buying and selling are conducted in a foreign country then it is referred to as foreign trade.  Foreign trade not only provides you with the best price for your goods but also satisfies the needs of people living in that respective country.

Due to different geographical conditions and available resources, some specific goods are only produced in a specific region of the world and thus creating a need for foreign trade. It provides people with more options to choose from and creates tough competition in the global market also leading to cutting down of prices. Foreign trade is now legal in almost all countries in the world but an individual needs to comply with the rules and regulations framed by the respective government for foreign trade. 

According to a recent report published by the Ministry of Commerce and Industry ‘In the year 2018, 44.8% of India’s GDP was accounted by Foreign trade’.

What is Foreign Investment?

Foreign investment simply means investing decent capital in a company based in another nation and seeking holdings in that company. As an individual starts a new business or a company he/she seeks an investor who can invest in their business and return get good profits. Many big companies and stakeholders usually invest in foreign companies to get a tax relation and acquire partial ownership in the company.

There are many types of Foreign Investment but are mainly Classified into Three Major Categories:

1. Foreign Direct Investment (FDI)

Foreign Direct Investment or FDI is a venture made by an organization or person who holds a company or a business in one country, through controlling possession in financial matters in another country. FDI could be either laying out business tasks or going through collaborations by consolidations and acquisitions, constructing new offices, and so forth.

In the year 2021 at the time of the pandemic COVID 19, India raised more than $81.72 billion from Foreign Direct Investment

2. Foreign Portfolio Investment (FPI)

Foreign Portfolio Investment (FPI) is an investment made by non-Indian residents in Indian protections including shares, government securities, corporate securities, convertible protections, framework protections, and so on. The goal is to guarantee a controlling revenue in India at speculation that is lower than FDI, with adaptability for passage and exit.

3. Foreign Institutional Investment (FII)

Foreign Institutional Investment (FII) is an investment made by foreign companies or individuals in genuine property and other speculation resources. Financial backers incorporate common asset organizations, flexible investment organizations, and so forth. The main intention isn’t to take a controlling interest, yet to broaden the portfolio guaranteeing to support and to acquire exceptionally high returns in a short period.

Difference between Foreign Trade and Foreign Investment:

Foreign Trade	Foreign Investment
Buying and selling goods in a foreign country.	Acquiring stakes or investing in a foreign company
Necessary to import and export essential goods from  different countries.	Diversifies the range of portfolios and leads to economic  growth
Provides instant profit to an individual or business.	Provides long-term profit to a company, Individual and nation.
For example trading of crude oil from Gulf countries to the rest of the world.	For Example, Tata Motors from India acquired Landrover, and Jaguar from Ford motors of Britain.

Pros and Cons of Foreign Trade and Investment:

Pros:

1. Almost every country has a product that is being produced in that respective country and if anyone outside that country wants to use that product then he/she needs to import it from that country. Thus foreign trade fulfills the need of numerous people across the globe.
2. Every new start-up or business requires financial support, thus foreign investment provides that financial support and helps businesses grow and expand.
3. Foreign investment also provides a boost to the economy of a nation.
4. Foreign trade provides better transportation as they are established in many different parts of the world and also promote your products to various countries.

Cons:

1. In many cases, it has been observed that foreign companies use the local resources of a country without taking proper pollution control norms into account thus resulting in health-related issues.
2. When a foreign company starts taking all the major decisions in a domestic company then it results in increased dependency.
3. The small-scale and home-based businesses are most adversely affected by foreign investment and trade as customers start moving towards these foreign brands.
4. Sometimes foreign trade and investment may also result in outrage among two nations as there may be a difference of opinion between among two countries.
5. Sometimes negligence in foreign policies also results in the exploitation of workers.

Conclusion

Foreign trade and foreign investment may be a bit different in terms of their operation but both of them provide a boost to the economy of a country and also results in a gradual increase in the GDP. Foreign direct investment creates better employment opportunities, brings-in new and advanced technology, promotes businesses, etc.