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 intra-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 theoretical 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.