International trade and foreign direct investment (FDI) are tightly intertwined ideas. The simplest concept is that countries trade to receive what they cannot produce (or cannot produce efficiently) at home. Ultimately, the famed Comparative model of trade holds that a free and competitive global market will create states and firms that will produce what they do best and most efficiently, leading to efficient production and low prices, and finally, a high standard of living for all.
The rise of the multinational enterprise (MNE) is really a function of the second half of the 20th century. The dominance of the United States over the globe's trading currency and her ability to create and regulate markets created a truly global market. Therefore, it became easier for firms to invest abroad. The result of this is what is known as “globalization,” or the development of a trade regime that permits the free movement of goods, services and labor regardless of national frontiers.
International trade and FDI are meant to boost profits as well as promote efficiency. Firms invest overseas to take advantage of cheap labor and/or natural resources with the aim of getting a leg up on domestic competition. Developing economies (especially in the third world) seek to create national incentives to attract FDI and hence attract the skills and technology necessary for their own development. Simply put, free trade holds to the concept that free movements of goods and services creates a win-win situation: domestic firms receive advantages from moving overseas, while the host country receives skills and training.
At least in theory, the concept of free trade, globalization and FDI are meant to reward efficiency. Yet the developing world (with a new notable exceptions such as Taiwan) remains underdeveloped. As MNCs invest abroad, they ship their products back to the industrialized world. The developing world is used for cheap labor and the advantages, but the rewards go to the home country. The Comparative/Free Trade theory holds that the developing world has not developed because their labor is non-productive. The advanced states have far more productive labor than the developing states.
Global trade promotes innovation, increases efficiency and generates economic growth. In addition, experts such as Denise Froning at the conservative Heritage Foundation holds to the view that free trade and FDI promote democracy and individual rights since FDI seeks states that are transparent and lack corruption.
International trade is normally conceived under two broad headings--modernization and dependency. Modernization holds that free trade will force states to improve their business climate to attract needed investment. On the other hand, dependency holds that free trade only benefits the powerful states, who merely use FDI as a way of taking advantage of cheap labor and low taxes.