Distinguish Between Foreign Trade and Foreign Investment
Distinguish Between Foreign Trade and Foreign Investment
In this digitalized world globalization is an integral phenomenon. When it comes to globalization – production, selling, and investing across countries have become an important phenomenon.
The process of globalization has integrated the markets all around the globe and has made the world one family where everyone is connected with each other. Therefore, MNCs and foreign trade can be considered agents of globalization.
With the increase in foreign investment by MNCs, the role of foreign trade is also increasing, because of which we are observing the integration of production and market across countries.
Distinguish between Foreign Trade and Foreign Investment
What is Foreign Trade?
Foreign Trade is the purchase and sale of goods and services across international borders. With globalization, the markets all across the world have become interconnected and interlinked and it has further enabled the role of foreign trade.
No country has all the resources at its disposal, some countries have one or the other resource in abundance to other countries. So, in order to fulfill their needs, one country imports a commodity that they have in scarcity from other countries which have it in excess and it forms the basis of foreign trade.
What is Direction of Foreign Trade?
The direction of Foreign trade means the countries to which the home country exports and the countries from which the home country imports.
Before Independence, India exported majorly to Britain and other Commonwealth countries but post-Independence our trading partners have expanded which points to our stronger foothold in International markets.
Now India's major trading partners are the U.A.E, China, U.S.A, Switzerland, Singapore, etc. Among all the countries, we Export most to the U.S.A and Import the most from China, and in recent years Chinese goods have dominated the market much more than Indian goods.
What is India’s Composition of Foreign Trade?
The composition of Foreign trade means the types of goods and services that the home country exports to foreign countries. The following are the features of the composition of foreign trade:
1). Decline in percentage share of Agriculture sector
In India, there has been a significant decline in the percentage share of agricultural items in total exports. It is due to the following reasons:
- India started using its farm products such as rice, and milk as raw materials for its domestic industry.
- The substantial rise in India’s population has resulted in a rise in domestic consumption.
2). Decline in Percentage share of conventional items:
- Conventional items including jute, tea, foodgrains, etc. constituted the bulk of India’s exports at the time of Independence.
- But now, with planned development, domestic demand for conventional items has tended to rise. Hence, their share in total exports has tended to fall.
3). Increase in the percentage share of manufactured goods:
- Gems and jewelry are India’s highest exporting categories of goods.
- The percentage share of manufactured goods in total exports of these items has increased over time.
What are the Types of Foreign Trade?
1). Import Trade: It is the purchase of goods and services from other countries to your home country. Countries either import those goods which they have in scarcity from other countries that have them in abundance or raw materials to produce the final product in their country themselves.
For example, Gulf countries have oil in abundance and not much in India and that is why India Imports the majority of its oil from the Gulf countries like Saudi Arabia.
2). Export Trade: It is the sale of goods and services to foreign countries from home countries. Countries export those goods which they have in abundance and hence sell those goods in international markets.
For example, India is a leading producer of cereals as it is an agricultural-driven country hence India exports a large number of cereals to foreign countries such as Saudi Arabia, Indonesia, and Bangladesh.
3). Entrepot Trade: It is a kind of trade mechanism where countries purchase products and services from one country, remodel, and then sell them in other countries.
For example, the diamond merchants of India import uncut raw materials, cut and repolish those diamonds in their units in India, and then re-export them to the markets of Amsterdam, Singapore, and Dubai.
Importance of Foreign Trade
- Capital goods and their know-how is very essential for the development of a country but with the help of foreign trade, we can take benefit from improved technology through imports.
- It helps in fulfilling the gaps between domestic demand and supply through imports.
- An increase in exports results in more production which leads to an increase in employment as it requires more manpower.
- Exports also lead to an increase in packing and transportation which results in the expansion of other industries as well.
- Foreign trade brings improvement in the agricultural, technology, and industrial sectors of the economy.
- Foreign trade ensures that there is no shortage of a particular commodity as commodities can be imported from other countries which will eliminate any shortage of that commodity.
- Foreign trade helps in improving the quality of locally manufactured products.
- Foreign competition can help in the price stability of a nation. If the price level of a good is high, then that good can be imported which will keep the price of that commodity in check.
The advantages of Foreign trade are immense and it has provided international access to domestic markets and at the same time exposed countries to resources they don’t have in their country.
What is Foreign Investment?
Foreign Investment means the inward flow of capital through which foreign companies or individuals invest in developing countries to take benefit of cheaper resources and a dynamic business environment.
Foreign Investment is another form of international business. Through this type of investment, foreign entities or individuals set up their businesses or manufacturing units in other countries or get a share in the existing businesses of other countries. The inflow of modern technologies and resources are some of the main advantages of foreign investment which is one of the major reasons why governments try to attract more foreign investment.
Foreign Investment in India
According to RBI, foreign investments mean any investment made by a person/resident outside India on a repatriable basis in capital instruments of an Indian company or to the capital of an LLP.
Here the capital instruments mean equity shares, convertible debentures, convertible preference shares, and share warrants.
Foreign investment in India is regulated in terms of clause (b) sub-section 3 of section 6 and section 47 of the Foreign Exchange Management Act, 1999 (FEMA).
Types of Foreign Investment
1). Foreign Direct Investment (FDI)
When the home country invites capital by allowing foreign companies to produce and sell directly in their country, such investment is called Foreign Direct Investment.
Foreign companies directly set up their business in India by constructing their plants, bringing in technology, and collaborating with Indian companies to do so. These companies either manage the entire business or have a say in the management if they are collaborating with the home country.
In general, the investment is made to gain a long-lasting interest in the enterprise the money is invested in. It is termed a direct investment because the investor company looks for a substantial amount of management control or influence over the foreign company.
2). Foreign Portfolio Investment
Foreign Institutional Investors or rather Foreign Portfolio Investors (FPI), as they are now known, are overseas companies registered in India with the intention to invest in Indian securities that are listed and traded on exchanges.
Foreign Institutional Investors play a very important role in any economy. These are the big companies such as investment banks, mutual funds, etc., who invest a considerable amount of money in the Indian markets.
They exert a strong influence on a country’s economy because the market trend moves upward when any foreign company invests or buys security or similarly, it goes down if it withdraws the investment made by it.
Benefits of Foreign Investment
- Foreign capital and technology can play a very important role in the socio-economic development of the nation.
- The foreign investment enables the nation to achieve a certain degree of financial stability, growth, and development.
- Foreign capital facilitates essential imports required for carrying out development programs like capital goods, know-how, raw materials, other inputs, and even consumer goods.
- It facilitates the transfer of technology to the recipient country.
Foreign Trade and Foreign Investment are considered to be the lifeblood and an important vehicle for economic development, especially for a developing nation. In this interconnected world, it enables nations to optimally utilize resources and technology through mutual cooperation and benefit mutually.
Frequently Asked Questions
Que1. What do you understand about liberalization of foreign trade?
Ans. Liberalization of foreign trade refers to the less restrictions on business activities and companies and focusing on creating a more suitable environment for businesses to flourish.
Placing lesser restrictions than before and allowing businesses to take decisions more freely on what they wish to import or export is liberalization of foreign trade.
Que2. Why do governments try to attract more foreign investments?
Ans. Foreign investments play an important role in the growth of a developing country, and therefore a government strives to get as much foreign investment as possible which is mutually beneficial. The benefit of foreign investments are:
- It helps in the improvement of the financial growth of individuals of a country by accelerating the development of nation.
- Foreign investment also facilitates the creation of new job opportunities in a nation as well as indirect jobs such as transportation.
- Foreign investment will result in business activities which could result in profits as well as additional tax revenue for the government.
Que3. How does foreign trade integrate markets?
Ans. Foreign trade facilitates the movement of goods across countries that integrate markets around the world.
- It provides an opportunity for the producers to expand their market beyond the geographical boundaries of the domestic country.
- Producers and customers across the world share resources, products, and technologies, which make the world one single market and facilitate the growth of developing nations, and open new markets for developed countries.
- Imports of foreign goods from international markets promote healthy competition among buyers and expand the options for buyers to choose from goods with competitive prices. Ex- Chinese decorative lights in Diwali give buyers an affordable option and Chinese manufacturers new markets.