Trade and FDI
Paper Session
Monday, Jan. 5, 2026 8:00 AM - 10:00 AM (EST)
- Chair: Paul Ko, Swarthmore College
Foreign Direct Investment and Intergenerational Occupational Mobility: Evidence from China
Abstract
This paper analyses the impact of foreign direct investment (FDI) liberalization on inter-generational occupational mobility in China by exploiting exogenous variations in FDI liberal-
ization induced by regulatory relaxation. Using a Shift-share instrument variable strategy and
national census data from 2000 to 2005, we find that individuals living in cities with greater
exposure to FDI Liberalization exhibit higher likelihood of being in a better occupation than
their fathers. The reason is that FDI liberalization leads to greater demand for high-skilled
labor and therefore, higher skill premium, which encourages workers in young generations
to obtain better education and work in high-skilled occupations. The positive effect is more
salient for families with low socioeconomic status and coming from underdeveloped regions.
Many Models, One Formula: A Sufficient Statistics Approach to Ricardian Comparative Advantage
Abstract
This paper develops a sufficient statistics framework for identifying Ricardian comparative advantage driven by exogenous differences in total factor productivity across countries and sectors. The framework applies broadly to models of monopolistic competition whenever three macro-level restrictions are satisfied: (i) aggregate profits are a constant share of aggregate sales; (ii) trade flows follow the structural gravity equation; and (iii) firm entry is free. The approach also extends to other market structures. We use it to estimate Ricardian comparative advantage, decompose changes in trade patterns over time, and assess how rising wages in China have influenced global trade.Going Overseas: FDI Decisions and Supply Chain Integration
Abstract
Amid China's strategic shift toward the "Going Overseas" initiative, this study investigates the role of Chinese outbound foreign direct investment (FDI) in integrating host countries into China's supply network. Leveraging a novel dataset that tracks Chinese overseas investments, alongside granular trade flow and input-output data, we construct measures of FDI exposure and upstreamness to analyze sectoral interdependencies. Empirical findings from reduced-form regressions reveal that Chinese downstream investments significantly enhance the market shares of same-origin firms in upstream sectors. Concurrently, investments in high-upstreamness sectors boost exports to China, particularly from lower-income countries, where quantity increases often outpace value gains, suggesting lower average prices. A theoretical model elucidates these dynamics through mechanisms of sourcing efficiency and network propagation. This research uncovers China's bifurcated FDI strategy—resource-driven in developing economies and market/technology-seeking in advanced ones—while offering an integrated empirical-theoretical framework to simulate policy scenarios. These insights contribute new stylized facts to the literature on global supply chains and provide actionable implications for policymakers and strategists.The Uncertainty Trap: How Policy Risk Holds Back Foreign Investment
Abstract
This study explores the impact of local policy uncertainty on foreign investment decisions, focusing on greenfield and brownfield foreign direct investments (GFDI/BFDI) and foreign portfolio investment (FPI) across 142 countries from 2008 to 2017. Our findings reveal that policy uncertainty significantly deters foreign investment, particularly in sectors with high sunk costs and limited asset redeployment flexibility. This effect is evident in both the number of investment projects and their monetary value, with GFDI and BFDI being more adversely affected than FPI. Individual investors exhibit greater sensitivity to uncertainty than institutional investors. Furthermore, the negative impact is more pronounced in vertical investments, where supply-chain dependencies heighten exposure to policy risks. Supported by instrumental variable estimations and robustness checks, our findings underscore the crucial role of policy stability in attracting and sustaining foreign capital.FDI and the Evolution of the Comparative Advantage of Nations
Abstract
This paper examines how Foreign Direct Investment (FDI) shapes the evolution of comparative advantages in global production networks. We integrate two distinct literature strands: international economics, which studies FDI's impact on growth and productivity (Borensztein, 1998, Alfaro et al.2004) but overlooks its role in structural change; and economic geography, which analyzes structural change through relatedness density and capabilities (Hidalgo et al 2007, Neffke et al 2011, Balland et al 2019) but underemphasizes external drivers.Our novel approach shifts from single-country analyses to a multi-country perspective, bridging Economic Geography with International Economics to examine how global FDI flows reshape comparative advantages. We build upon Bahar et al (2014), who established how comparative advantages evolve through knowledge diffusion between neighboring countries, by examining how FDI facilitates knowledge transfer and shapes specialization patterns, following Boschma et al (2017) work on relatedness in regional export structures.
Our analysis employs both static models examining export similarity indices through gravity-style specifications and dynamic models on export portfolio evolution. Our empirical strategy integrates economic complexity methodologies as in Hidalgo et al (2007) and Hidalgo and Hausmann (2009) with insights from FDI spillover studies (Javorcik, 2004) and industrial upgrading research (Lin, 2012).
Our findings reveal that complementarity between host and source country specialization patterns significantly increases the probability of new product entry in host economies and show that linkage quality drives diversification. Domestic capabilities play a fundamental role in consolidating comparative advantages, while external linkages with complementary capabilities amplify this process by introducing relevant knowledge. Geographic neighbors also influence diversification, as their specialization profiles positively affect the host country's ability to enter new products, reinforcing that geographic proximity facilitates capability diffusion.
JEL Classifications
- F6 - Economic Impacts of Globalization