FDI and the evolution of the comparative advantage of nations

This paper examines the role of Foreign Direct Investment (FDI) in shaping comparative advantage within global production networks, conceptualizing FDI as a vector for cross-border capability transfer. Using a bilateral dataset for 138 countries over 2001–2021, we combine static and dynamic empirical approaches. The static analysis shows that country pairs with larger bilateral FDI stocks exhibit greater similarity in export structures. The dynamic analysis shows that complementarities between a host economy’s FDI partners and its own productive base raise the probability of entering new product specializations. This effect is conditional: it requires adequate domestic capabilities, is stronger in more developed economies, and exhibits substitution between direct and related forms of complementarity. Crucially, FDI linkages do not extend the host’s reach into the most complex goods, where domestic relatedness dominates. FDI thus supports diversification into standard products, but cannot substitute for domèstic capability-building in the most demanding segments of the product space.