Trade Theories: #8.Human Skills Theory

Rybczynski TheoremProduct Cycle ModelOLI TheoryNational Competitive Advantage

Human Skills Theory (We looked that this with Leontief)Donald Keesing (1966)Emphasizes differences in endowments and intensities of skilled and unskilled workers.Explains the Leontief paradox: Since the U.S. has highly trained, educated workers relative to other countries, U.S. exports tend to be skilled-labor intensive.

Rybczynski TheoremExtension to the H-O model

At constant world prices, if a country experiences an increase in the supply of one factor, it will produce more of the product intensive in that factor and less of the other.

Not really a trade model, but rather looks at the endowments that we have been discussing.

Rybczynski TheoremExtension of H-O modelLook at ONE Countrys PPF

Production of Goods S and T

T capital intensive S Labor intensive

Production mix is originally at Point Xo

commodity prices are given

If there is an increase in Labor (which is used intensively in the production of S ecoomic Growth will occur and the PPF will shift outward (with a bias toward S)

Production will now occur at X1 where there is an increase in the production of S and a decrease in the production of T

The Effect of an Increase in a Factor

Extension of the HO Model: The Product CycleDeveloped by Raymond VernonProduction of a good is cyclical

When a manufactured good is developed, producers experiment and seek consumers reactionsWhen production leaves the early stage, the good begins to be standardized in terms of size, features, and manufacturing processFinally, consumption of the good in a high-income country exceeds its production: production moves where labor costs are lower

The Product Cycle in High-Income CountriesConsumptionProduction

The Product Cycle in Low-Income CountriesConsumptionProduction

The Product Cycle and Trade Implications

Increased emphasis on technologys impact on product cost

Explained international investment

LimitationsMost appropriate for technology-based productsSome products not easily characterized by stages of maturityMost relevant to products produced through mass production

Intra-firm Trade: Extension of the HO Model:Foreign Trade versus Foreign InvestmentMuch of international trade is driven by foreign investment by multi-national firmsFirms prefer to invest abroad and produce there directly, rather than export (they substitute foreign investment for foreign trade)Output produced in the foreign operation can be sold directly to the foreign market or shipped back to the home nation (they engage in intra-firm trade to take advantage of advantageous foreign conditions)

Intra-firm Trade Reasons for intra-firm tradeFirms take advantage of cross-country differences in the price of inputsA firm may reduce distribution costs in a foreign market by operating through an affiliate

Intra-firm trade is growing in importanceAround 2005, more than 1/3 of US merchandise exports and 2/5 of merchandise imports were intra-firm

OLI TheoryOLI theory (Ownership-Location-Internalization)Firms investing abroad own an asset that gives them an competitive advantage (Ownership)Firms seek a production location that offers them advantages (Location)Firms try to internally capture the advantages of foreign asset ownership (Internalization)

Off-shoring and Outsourcing

Outsourcing is the reassignment of activities to another firm, either inside or outside the home countryTrade in services is consistent with traditional trade models based on comparative advantageFundamental debate is the impact of outsourcing on jobsOff-shoring is defined as the movement of some or all of a firms activities to a location outside the home countrySome firms off-shore, but do not outsource, choosing to use a foreign affiliate; a foreign-based operation owned by the firm in the home country

Theory of national competitive advantage The theory attempts to analyze the reasons for a nations success in a particular industryMichael Porter studied 100 industries in 10 nationspostulated determinants of competitive advantage of a nation based on four major attributesFactor endowmentsDemand conditionsRelated and supporting industriesFirm strategy, structure and rivalry

Porters diamond

Success occurs where these attributes exist.More/greater the attribute, the higher chance of successThe diamond is mutually reinforcing

Factor endowmentsBasic factors: Factors present in a countryNatural resourcesClimateGeographic locationDemographics While basic factors can provide an initial advantage they must be supported by advanced factors to maintain success

Advanced factor endowmentsAdvanced factors: The result of investment by people, companies, governments and are more likely to lead to competitive advantage

communicationsskilled laborresearchtechnologyeducation

If a country has no basic factors, it must invest even more in advanced factors

Demand conditionsDemand:creates capabilities creates sophisticated and demanding consumers

Demand impacts quality and innovation

Related and supporting industries

Creates clusters of supporting industries that are internationally competitive

Must also meet requirements of other parts of the Diamond

Firm Strategy, Structure and Rivalry

Long term corporate vision is a determinant of successManagement ideology and structure of the firm can either help or hurt youPresence of domestic rivalry improves a companys competitiveness

Determinants of Competitive Advantage in nations

Porters Theory-predictions

Porters theory should predict the pattern of international trade that we observe in the real world Countries should be exporting products from those industries where all four components of the diamond are favorable, while importing in those areas where the components are not favorable

Implications for businessLocation implications: Disperse production activities to countries where they can be performed most efficientlyFirst-mover implications:Invest substantial financial resources in building a first-mover, or early-mover advantagePolicy implications: Promoting free trade is in the best interests of the home-country, not always in the best interests of the firm, even though, many firms promote open markets

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