The present survey studies the interactive relationship between trade and foreign direct investment. This is one of the most important issues in recent literature of international trade. Ever-increasing development of international economic organizations and regional economic unions, financial markets' integration, creating monetary unions, liberalization and easier exchange of products and services, capital transfer and integration of large manufacturing companies that are aspects of globalization of economy affect developed international trade and foreign direct investment. Importance of these two macro-economic variables has persuaded policy-makers to identify the relationship among variables holistically and recognize effective factors on them in their countries. This survey studies the mutual relationship between trade and foreign direct investment. In this paper, by using the gravity theory, suitable tool to analyze relations between foreign direct investment and trade variables is provided. Helpman and Krugman's (1985) study indicated gravity model could be used in trade models with distinct goods so that production distinction could be created through country of origin, economic scale, and difference in inventory of production factors or technology. The Result based on the research sample of OECD countries, Iran and Armenia by using Baltagi and Nosa methods shows a positive and significant impact of trade flows on attracting foreign direct investment.
JLE Classification: F02, F11.
