The Differences Between Foreign Trade and Foreign Direct Investment

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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
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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 geographical proximity of the host country, labour costs, quality and availability, etc. (Žďárek, 2008)
Third, the last one is conglomerate. Here is added abroad unrelated business. This motive is unusual form of FDI. It involves two strategies simultaneously. First is to enter foreign market and second is new industry.

According to method of entry we

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