Multinational Investors as Export Superstars: How Emerging-Market Governments Can Reshape Comparative Advantage

Abstract

This paper investigates three cases — Malaysia, Costa Rica, and Morocco — in which host authorities were successful in using foreign direct investment to change the export profile of the domestic economy. Each case highlights the importance of first-mover firms, and clusters of follower firms, in oligopolistic industries, whose emergence changes the revealed comparative advantage of the domestic economy. The results from these three cases are shown to be consistent with a broader body of econometric analysis. An important implication is that small emerging markets may be better equipped to transform their production structure and stimulate exports with foreign direct investment than by promoting broad domestic entrepreneurship. Our results show that host-country policy changes can have very large effects if they alter the entry of multinationals or the behavior of large firms.