Revisiting the relationship between comparative advantage and FDI using global greenfield FDI data

Purpose We examine the relationship between comparative advantage and Foreign Direct Investment (FDI) using a unique proprietary worldwide data set of transaction-level greenfield FDI deals for the period 2003–2017, sourced from fDi Markets (Financial Times), across 17 major industries. Design/methodology/approach We construct regression-based measures of comparative advantage based on a novel methodology. Findings Contrary to the predictions of the “factor-proportions” view, we find that overall greenfield manufacturing FDI is positively correlated with comparative advantage. This supports the “firm-specific” view. However, we find that this relationship holds solely, but strongly, for lower-income countries and not for higher-income countries. This is the first worldwide test of a research question that has remained unresolved since the 1970s. Research limitations/implications This study is limited to greenfield FDI and does not include M&A-type FDI. Thus, the results are useful in answering questions related to job-creation and new capital infusions to the host country via FDI. Practical implications Besides casting light on the above theoretical discussion, our results can serve as a guide for policymakers seeking to attract more FDI in key sectors. Social implications The relationship holds solely, but strongly, for lower-income countries and not for higher-income countries. Originality/value This is the first worldwide test of a research question that has remained unresolved since the 1970s.