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Comparative Advantage, Outward Foreign Direct Investment and Average Industry Productivity: Theory and Evidence

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  • Hea-Jung Hyun

    (Kyung Hee University)

  • Yong Joon Jang

    (Kyung Hee University)

Abstract

This paper analyzes the role of comparative advantage in the effects of outward FDI on domestic productivity. In the theoretical framework, we place Helpman, Melitz and Yeaple��s (2004) outward FDI model into Bernard, Redding and Schott��s (2007) framework of international trade with heterogeneous monopolistically competitive firms and comparative advantage and show that the increase in outward FDI raises aggregate productivity in all industries through the in tra-sectoral reallocation of firms, but this productivity growth is more prominent in a nation��s comparative advantage industry. Using Korean industry-level data, we empirically test our theoret ical predictions using the production function model as a benchmark model, followed by system GMM estimation methods for sensitivity analysis. Our empirical findings also suggest that outward FDI has a positive effect on domestic productivity and this link is more likely to take place in those sectors above average competitiveness measured as export-based revealed comparative advantage.

Suggested Citation

  • Hea-Jung Hyun & Yong Joon Jang, 2015. "Comparative Advantage, Outward Foreign Direct Investment and Average Industry Productivity: Theory and Evidence," Korean Economic Review, Korean Economic Association, vol. 31, pages 327-357.
    • Handle: RePEc:kea:keappr:ker-20151231-31-2-04
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    Cited by:

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    2. Suyi Kim, 2019. "CO2 Emissions, Foreign Direct Investments, Energy Consumption, and GDP in Developing Countries: A More Comprehensive Study using Panel Vector Error Correction Model," Korean Economic Review, Korean Economic Association, vol. 35, pages 5-24.
    3. Hyun-Hoon Lee & Donghyun Park & Kwanho Shin, 2017. "Effects of China's Structural Change on the Exports of East Asian Economies," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 25(3), pages 1-30, May.

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    More about this item

    Keywords

    Direct Investment; Firm Hete rogeneity; Aggregate Productivity; Comparative Advantage;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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