The Differences Between Foreign Trade and Foreign Direct Investment

Foreign trade

Foreign trade is exchange of capital, goods, and services across international borders or territories. In most countries, it represents a significant share of gross domestic product (GDP). (http://www.yourarticlelibrary.com)

It is a trade between two or more countries and we can separate into three parts.

• Import- Affluent countries import resources and commodities when they find comparative advantages in sourcing from foreign locations. (Holt, Wigginton, 2002)

• Export – involves selling domestically produced products in foreign market through brokers or overseas distribution centres. (Holt, Wigginton, 2002)

• “Entrepot”– import goods for re-export after previous operations

Every country has lack of any resource and due to this fact they have to trade goods etc. with other countries worldwide. Nowadays during days of globalization is demand for goods and services increasing. This natural trade is here for centuries, but now we have better logistics and faster shipments and cooperation between countries is easier.

Problems that traders are facing are in general different currencies, law systems, regulations and somewhere trade barriers.

Foreign direct investment (FDI)

Investment from one country into another (normally by companies rather than governments), that involves establishing operations or acquiring tangible assets, including stakes in other businesses. (Financial Times) FDI means investment of foreign assets into domestic structures, organizations and equipment. It’s a key element in economic integration and creates direct, stable and long- lasting links between economies.

OECD defined accepted threshold for FDI relationship as at least 10 % or more of voting stock or ordinary shares that fo...

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...in the hands of Procter & Gamble

Positive impact of FDI is restructuring on supply side of economy, increased export performance and non- debt financing of the current account deficit new job opportunities and revenues from privatization for the government.

Negative impact is Repatriation of profits abroad, or subsequent outflow of FDI from countries threaten the country's external balance. FDI inflows surge exchange rate deviates from the equilibrium and at least FDI includes tax breaks as well as direct subsidies from the state budget. (Srholec 2004)

Conclusion

Main difference is that foreign trade is about selling, purchasing products or services briefly. It is just transaction, on the other hand, FDI are long-term processes where company invest by capital to foreign companies or businesses. In FDI company tries to invest and settle down in foreign market.