Foreign Trade Investment and Foreign direct investment

Table of Contents

Foreign Trade Investment

Foreign Trade Investment is an important part of economy covered in syllabus of various competitive examinations. We need to understand separately what is Foreign trade and what is Foreign Investment. Follow the article carefully to cover all the relevant aspects.

Foreign Trade is the exchange of goods and services between two or more countries in the international market. Every country, including the developed countries, are dependent on one another for natural or finished resources. This need is met by foreign trade which involves change in ownership of goods and services. This shift of ownership happens through transaction of money. In earlier times, barter system was primarily used for trade, where goods and services were exchanged in return for other products or services. The use of money has made trading faster and smoother.

Types of Foreign Trade

There are two types of foreign trade:

Import: It is the purchase of goods and services by one country from another. Countries import goods and services when they need raw materials or finished goods.
Export: It is the selling of goods and services to another country. Countries export their surplus goods and services to another nation.

Foreign Investment is the inflow of capital into a country through individuals or institutions from a different country. The investment helps corporations to widen their business in another country.

Types of Foreign Investment

There are three types of investments an entity belonging to one country can make in another country. These are as follows:

Foreign Direct Investment: This type of investment involves infusing of capital into another country’s business or production units. It involves transfer of stake or ownership.
Foreign Portfolio Investment: When an organisation based outside the country invests in the securities market of that country, it becomes a foreign portfolio investment.
Foreign Institutional Investment: This is a form of investment by a foreign-based company in the passive holdings of an entity in another country.

Foreign Trade Investment in India

India’s FDI inflows have increased 20 times from 2000-01 to 2021-22. According to the Department for Promotion of Industry and Internal Trade (DPIIT), India’s cumulative FDI inflow stood at US$ 847.40 billion between April 2000-March 2022; this was mainly due to the government’s efforts to improve the ease of doing business and relax FDI norms.

India’s merchandise export in 2021-22 (April-January) was USD 335.44 billion, an increase of 46.53% over USD 228.9 billion in 2020-21 (April-January) and an increase of 27.0% over USD 264.13 billion in 2019-20 (April-January).

India’s merchandise import in 2021-22 (April-January) was USD 495.83 billion, an increase of 62.68% over USD 304.79 billion in 2020-21 (April-January) and an increase of 22.3% over USD 405.33 billion in 2019-20 (April-January).

Foreign Investment Trade Barriers

There are several barriers which hinders growth of Foreign Trade & Investment. These are summarised below.

Tariff barrier: This is imposition of tax on imports which raises the price of imported goods relative to domestic goods.
Non-Tariff barrier: This includes imposition of quota limitations which hinders imports. Also, subsidies provided by government of one country to exported products makes other countries product costlier, thus out of competition.
High Logistics Cost: This increases the cost of domestic goods, and they couldn’t compete in international market.
Lack of Infrastructure: This hinders both trade and investment.
Lack of manufacturing base: This hinders production of quality goods, which are not appreciated in international market.
Environmental regulations: This requires entities willing to make investment or production meet the environmental norms which often acts as hindrance in trade and investment.

Foreign Direct Investment

Foreign Direct Investment or FDI is investment from an individual or firm or sovereign fund that is located in a foreign country into another country. FDI results into transfer of ownership to the entity making the investment.

Generally, FDI is when a foreign entity acquires ownership or controlling stake in the shares of a company in one country, or establishes businesses there.
It is different from FPI where the foreign entity merely buys equity shares of a company and does not get ownership.
FDI is not just the inflow of money, but also the transfer of technology, knowledge, skills and expertise.

Foreign Direct Investment Examples:

In May 2022, India received FDI investments of Rs. 494 crore in the defence manufacturing sector.
In May 2022, Italian financial services major Generali completed the acquisition of a 25% stake in Future Generali India Insurance from Future Enterprises for Rs. 1,252.96 crore.

Foreign Direct Investment Advantages And Disadvantages

FDI, on the one hand, help bring capital, technology, know-how etc. but on the other it comes with lots of disadvantages. We have discussed these advantages and disadvantages point wise below.

Advantages of FDI

The advantages brought by Foreign Direct Investment includes the following:

Brings in financial resources for economic development, especially for developing countries.
Brings in new technologies, skills, knowledge, etc.
Generates more employment opportunities.
Brings in a more competitiveness in the country.
Improves the quality of products and services in sectors.
It is a major source of non-debt financial resources for the economic development of a country.
Helps improve the skill of employees.

Disadvantages of FDI

Some of disadvantages associated with foreign direct investment are:

It is seen that many domestic companies especially the MSMEs finds themselves unable to compete with the MNCs making the investment in the country.
Large MNCs interfere with the laws and regulations of domestic government.
It also adversely affect the exchange rates of a country.
It is seen that through FDI, MNCs dump old and outdated technologies in developing countries. Thus raising environmental concerns.

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