FDI and the evolution of the comparative advantage of nations

This paper investigates the role of Foreign Direct Investment (FDI) in shaping the evolution of comparative advantages within global production networks. Extending existing frameworks on knowledge diffusion, we conceptualize FDI as a vector for cross-border capability transfer. The empirical strategy combines static and dynamic approaches: the static analysis employs gravity-style models to assess patterns of export similarity across countries, while the dynamic analysis examines how FDI influences specialization, with a particular focus on high-complexity sectors. Drawing on a bilateral dataset covering FDI and trade flows for 138 countries over two decades, from 2001 until 2021, the results show that FDI significantly enhances the host economy’s ability to develop new comparative advantages in capability-intensive goods. Moreover, the dual approach reveals that FDI supports both diversification and consolidation, acting through different mechanisms. These findings offer new insights into the processes of industrial upgrading and structural transformation in an increasingly interconnected global economy.