Specific Factors, Comparative Advantage and International Investment: An Extension

Abstract

In a recent article, Amano (1977) used a two-commodity, three-factor model, developed by Jones (1971) and extended by Mayer (1974) and Mussa (1974), to analyse the role of specific factors in international trade and investment. His analysis concentrated on two aspects: first, on examining the importance of specific and mobile factors in determining comparative advantage in this structure; second, on commenting on certain features of Caves' (1971) consideration of the determinants and consequences of international investment in this framework, in which foreign investment is viewed as inter-country flows of industry-specific capital. The purpose of this paper is to extend Amano's analysis into a new structure, which combines elements of the standard Heckscher-Ohlin-Samuelson (H-O-S) and specific factor (SF) models, and is better equipped to handle international mobility of specific factors. The difficulty with the SF, as with H-O-S, model, when all capital is internationally mobile, is that the location of world production is then indeterminate. Within a certain range, therefore, the movement of capital from one country to the other merely alters the location of production, without altering its total. As Amano notes, this property implies that any tariff is prohibitive, short of specialization, since capital flows, responding to the return differential created by the tariff, simply relocate production until trade, at least in the sense of a two-way commodity flow, is eliminated. A one-way commodity flow may continue if foreign earnings are repatriated. But unless factor movements are restricted or taxed, the tariff alone loses all flexibility as a method of adjusting domestic production. Since this is both a strong and largely undesirable property, the development of a new structure, which retains most of the traditional features of trade models yet permits capital mobility without such extreme consequences, seems worthwhile. Section I gives a brief diagrammatic exposition of Amano's results for the SF model, and the consequences of full capital mobility. Section II then introduces our hybrid structure, and relates the determinants of comparative advantage and the consequences of capital mobility to those discussed by Amano. The fact that all the main ingredients are familiar from the H-O-S and SF models considerably facilitates our discussion.