Specific Factors, Comparative Advantage and International Investment

Abstract

The Heckscher-Ohlin-Samuelson (H-O-S) model has played a central role in the pure theory of international trade, contributing to the clarification of such diverse questions as the determinants of comparative advantage, the effects of trade upon factor prices, the effects of economic growth on international trade and vice versa, the relationship between international movements of goods and factors, and so forth. However, contrary to the original intention of Ohlin himself, as has been exemplified in his discussion in Harrod and Hague (1963, pp. 398-399), this model has tended to concentrate on a relatively small number of generic factors of production such as capital and labour, and to neglect the role played by those factors that are somehow specific to various industries. Harrod, on the other hand, emphasized the importance of industry-specific factors many years ago, viewing their relative abundance as a major cause of differences in comparative advantage. (See Harrod, 1957, pp. 19 and 36, 1958; and Harrod and Hague, 1963, pp. 422-423. For his own definition of specific factors see Harrod, 1957, p. 33.) It may be argued, however, that the emphasis on specific factors may lead to a danger of circular reasoning unless one can successfully explain the mechanism that determines the relative supply of these factors. Take the ordinary two-factor, two-commodity H-O-S model, for example, and suppose that a country has a comparative advantage in the labour-intensive (say, textile) industry because of its relative abundance of labour. In the trade equilibrium position a relatively large proportion of labour will be engaged in the textile industry, and those workers in this industry must have acquired specific skills which are necessary to produce textiles. They are specific factors, at least for the short run. It would not be particularly interesting, however, to state that the country has a comparative advantage in the textile industry because it has a relatively abundant supply of textile workers, since they have become relatively abundant as a result of the expansion of the textile industry in which the country has a comparative advantage, and not vice versa. Thus, there is a clear limitation to a theory based on specific factors which does not analyse the mechanism that determines their supplies. On the other hand, it may also be argued that one need not seek merely the long-run determinants of international trade and investment. We may conceive of specific factors such as those whose inter-industry mobility is limited in the short run, and limit our scope to a relatively short period of time, the length of the period being dependent upon the degree of shiffability of a particular factor of production concerned: see the view of Haberler in Harrod and Hague (1963, p. 396). It is in this context that we now