Comparing Sectoral FDI Incentives:  Comparative Advantages and Market Opportunities

Larry D. QIU

In this paper we closely examine the implications of comparative advantage for foreign direct investment (FDI) incentives. Particularly, we find that the host country’s comparative advantage sector is more attractive to inward FDI than its comparative disadvantage sector. This finding is supported by empirical evidence. However, such a cross-sector FDI comparison has not been studied, theoretically and explicitly, in the literature. This paper contributes to the literature by filling this gap. We have also obtained some other results such as how the degrees of comparative advantage and absolute advantage affect FDI incentives, and whether a multinational corporation (MNC) should allow its foreign subsidiary to be run independently.

Key Words: Foreign direct investment (FDI); Multinational corporation (MNC); Comparative advantage; Absolute advantage; Market opportunity;  FDI incentives.
JEL Classification Numbers: F12, F13, F21, F23.