If someone buys something from a producer in one country and ships it to another country, that is a trade transaction.

If trade is balanced, as in Ricardo's model, then the international finance for that import of an investment good would come from equivalent export earnings of that country.

But trade is not balanced, so assuming a foreign-controlled subsidiary is importing that investment good, it does so by borrowing money from banks in the low-income country, at a preferential rate because it is a quite desirable customer for a bank or financial intermediary in that country.

Given the normal tendency for net capital flows go to high income countries from low income countries(NB), the international finance comes from either elbowing aside other imports, forcing down the terms of trade to make exports more competitive and reduce incomes earned on resources used in the low-income country, or as a result of other wealthy corporations offering to either take over a larger share of the low-income nation or else help put the low-income nation deeper in debt to overseas interests.

(NB. This is not how it would work if the world was like the traditional marginalist theory, where there is no international hierarchy of core, semi-peripheral, and peripheral nations, but out here in the real world, high income core economies have the hard currencies, and there is therefore a strong incentive for those accumulating wealth in low-income countries to exchange that for wealth in a hard currency and hold their wealth in account balances in a core economy somewhere.)


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.