The Differences Between Foreign Trade And Foreign Direct Investment

1796 words - 7 pages

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). (
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 foreign investor must own of the invested company. In general it means that example of FDI would be American company taking a majority stake in Japanese company or Canadian company that is setting up a joint venture to develop a mineral deposit in Chile.
There are three main motives. First motive - horizontal – is market seeking. Main aim of investments is to get to domestic market and acquire certain shares. Market seeking investments may also cause displacement of domestic production. The main factors stimulating the market seeking FDI are therefore the size, growth and easier handling foreign market. The form of investment is characterized by the proportion of identical product at home and abroad, boost investment becomes utilization of lower production costs, use of savings from easier overcome barriers to entry foreign markets. Example is Toyota when assembled cars in UK and Japan.
Second motive – vertical- is efficiency seeking. Investments transfer to local (domestic) economy part of production chain of the parental company with aim to increase its competitiveness by reducing production costs. Vertical FDI have high tendency to export products produced in the host country. (King 2004) They are supported by the...

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