Difference Between Foreign Aid and Foreign Investment

Foreign Aid vs Foreign Investment
 

Globalization has resulted in more global trade, increased cooperation among nations, international investments, and global transfer of capital, assets, resources and funds. Foreign aid and foreign investment both involve such transfers of capital, funds, resources, etc. from one country to another. Despite the fact that both foreign investment and foreign aid involve capital flows to and from nations, the aim and the expected returns from each are quite distinct to one another. The article offers a clear overview of each concept and shows the similarities, differences and relationship between foreign aid and foreign investment.

What is Foreign Aid?

Foreign aid refers to funds that are made available to struggling nations by countries that have the necessary financial strength to aid a country in time of need. Foreign aid can be in the form of low-interest loan, grants, relaxed trade policies, preference in terms of trade agreements, technological knowhow and equipment transfers, donations in medical supplies, food and necessities, military equipment, etc. Foreign aid mostly takes the form of low-interest loan where the country in need can borrow funds at a lower cost with relaxed payment terms.

The aim of foreign aid is to help the country in need by offering them assistance in solving their problems and fulfilling their needs. As certain countries, cities, and localities lack the required funding, assets, facilities, infrastructure or know-how to solve their problems, receiving foreign aid can greatly help such countries create long lasting solutions to their issues. Foreign aids can help resolve short term problems such as poverty and hunger as a result of the war, or to resolve long-term issues such as improve and develop the country’s technological infrastructure.

What is Foreign Investment?

Foreign investment is where one country will make investments in a foreign country with the main aim of making profits. Types of foreign investment include foreign direct investment (FDI), foreign portfolio investment (FPI), foreign commercial loans, etc. Foreign direct investment is when a firm in one country invests in a business that is located in another country. A firm may have FDI when the home country firm holds more than 10% of its shares in a foreign subsidiary. Multinational firms looking to start up operations in a foreign country generally start with an FDI to test the market place before a big move. A foreign portfolio investment is when a firm or individual invests in a foreign firm by purchasing stocks, bonds and securities from that foreign company. A foreign commercial loan between nations or individual firms is where a loan will be granted from a bank or financial institution in one country to an entity in another country.

What is the difference between Foreign Aid and Foreign Investment?

Both foreign aid and foreign investment involve the transfer of funds, capital and resources from one country to another. Both foreign aid and foreign investment are recorded in a country’s balance of payments. The main difference between foreign aid and foreign investment lies in their underlying purposes and aims. The main aim of foreign aid is to help nations in need by offering assistance in terms of funds, assets, low-interest loans, resources, medical supplies, etc. The country that offers foreign aid generally does not expect anything in return except that with their help the nation in need will be able to solve their issues permanently. Foreign investment, on the other hand, is where a country will make international investments in another country in the form of foreign direct investments, foreign portfolio investments, and foreign commercial loans. The aim of these investments is to gain income in terms of interest payments, dividends, capital appreciation, etc.

Scholars have identified a relationship between foreign aid and foreign investment. When a country offers aids to a nation in need, this will result in better infrastructure, technological development, development of industries, and overall economic development. Once the aid receiving nation reaches a certain level of economic development through foreign aid, this may encourage countries to make higher foreign investments in these developing economies.

Summary:

 Foreign Aid vs. Foreign Investment

• Foreign aid refers to funds that are made available to struggling nations by countries that have the necessary financial strength to aid a country in time of need.

• Foreign aid can be in the form of low interest loan, grants, relaxed trade policies, preference in terms of trade agreements, technological know-how and equipment transfers, donations in medical supplies, food and necessities, military equipment, etc.

• The aim of foreign aid is to help a country in need by offering it assistance in solving its problems and fulfilling its needs.

• Foreign investment is where one country will make investments in another country with the main aim of making profits.

• Types of foreign investment include foreign direct investment (FDI), foreign portfolio investment (FPI), foreign commercial loans, etc.