The Korean Economic Review
Comparative Advantage, Outward Foreign Direct Investment and Average Industry Productivity
Hea-Jung Hyun (Kyung Hee University), Yong Joon Jang (Kyung Hee University)Year 2015Vol. 31No. 2
This paper analyzes the role of comparative advantage in the effects of outward FDI ondomestic productivity. In the theoretical framework, we place Helpman, Melitz andYeaple’s (2004) outward FDI model into Bernard, Redding and Schott’s (2007) frameworkof international trade with heterogeneous monopolistically competitive firms andcomparative advantage and show that the increase in outward FDI raises aggregateproductivity in all industries through the intra-sectoral reallocation of firms, but thisproductivity growth is more prominent in a nation’s comparative advantage industry. UsingKorean industry-level data, we empirically test our theoretical predictions using theproduction function model as a benchmark model, followed by system GMM estimationmethods for sensitivity analysis. Our empirical findings also suggest that outward FDI has apositive effect on domestic productivity and this link is more likely to take place in thosesectors above average competitiveness measured as export-based revealed comparativeadvantage.