Absolute and Comparative Advantage

Comparative advantage and green business 25 June 2008 URN 08/1036 Ernst & Young  i Ernst & Young LLP 1 More London Place London SE1 2AF Tel: 020 7951 2000 Fax: 020 7951 1345 www.ey.com/uk Mr Brian Titley Director Department for Business, Enterprise and Regulatory Reform 1 Victoria Street London SW1H 0ET 23 June 2008 Research project for the Department for Business, Enterprise and Regulatory Reform “Comparative Advantage and Green Business” Dear Brian In accordance with the engagement letter dated 5 th February 2008, we enclose our report in relation to the analysis of “comparative advantage and green business”. Our report focuses on the evidence on the potential business opportunities for the UK economy to move to a ‘green’ or low carbon, resource efficient economy. Scope of our work This scope sets out our understanding, based on discussions with you, of your objectives, the issues that are relevant to those objectives and the work we have agreed to perform. These Services are based on your Terms of Reference dated 5 th February 2008. In undertaking our work we have based our analysis and views on publicly available information, information provided to us by the Department for Business, Enterprise and Regulatory Reform (BERR) and our own information sources. The scope of our work has focused on four areas: 1. Definition and characteristics of green businesses – we define what is meant by and propose a framework of analysis for green business. 2. Assessing the UK comparative advantage – we identify sectors in which the UK has comparative advantage through analysis of trade data and analysis of foreign direct investment flows. 3. Characteristics of successful green business models – informed by a selected number of case studies of successful green businesses or clusters/regions, we draw out what are the key success factors for green business. 4. Policy impact and unintended consequences – through use of the Oxford Economic model, we illustrate the types of impact on the wider UK economy of different modes of developing green process and products in different sectors of the economy. Ernst & Young  ii Purpose of our report and restrictions on its use The Report has been prepared on the specific instructions of BERR. It is our understanding that BERR wishes to use the Report to inform the policy discussion about how to assist businesses moving to a low carbon and resource-efficiency economy. The Report should not be relied upon for any other purpose. It is important to recognise that our work is limited to the scope described herein and has been carried out over a limited period of time, and is based on publicly available industry data, information supplied by BERR, and Ernst & Young proprietary information. It is possible that the Report, which does not constitute an audit, may not reveal all those matters which would have been identified by a full scope report. As a consequence, further and analysis will be required prior to relying on the information in the Report. Yours faithfully Ernst & Young LLP Ernst & Young  iii Ernst & Young LLP Disclaimer The Report was prepared solely for the use of the Department for Business, Enterprise and Regulatory Reform (BERR) and addressed issues specific to them. Accordingly, we may not have addressed issues of relevance to any other party. Further, the Report was concluded on 20 th of June, and we have not undertaken any further work since that time. Material events may therefore have occurred which will not be reflected in the Report. The analysis has been based on information Absolute and Comparative Advantage Absolute and Comparative Advantage By: OpenStaxCollege The American statesman Benjamin Franklin (1706–1790) once wrote: “No nation was ever ruined by trade.” Many economists would express their attitudes toward international trade in an even more positive manner The evidence that international trade confers overall benefits on economies is pretty strong Trade has accompanied economic growth in the United States and around the world Many of the national economies that have shown the most rapid growth in the last few decades—for example, Japan, South Korea, China, and India—have done so by dramatically orienting their economies toward international trade There is no modern example of a country that has shut itself off from world trade and yet prospered To understand the benefits of trade, or why we trade in the first place, we need to understand the concepts of comparative and absolute advantage In 1817, David Ricardo, a businessman, economist, and member of the British Parliament, wrote a treatise called On the Principles of Political Economy and Taxation In this treatise, Ricardo argued that specialization and free trade benefit all trading partners, even those that may be relatively inefficient To see what he meant, we must be able to distinguish between absolute and comparative advantage A country has an absolute advantage in producing a good over another country if it uses fewer resources to produce that good Absolute advantage can be the result of a country’s natural endowment For example, extracting oil in Saudi Arabia is pretty much just a matter of “drilling a hole.” Producing oil in other countries can require considerable exploration and costly technologies for drilling and extraction—if indeed they have any oil at all The United States has some of the richest farmland in the world, making it easier to grow corn and wheat than in many other countries Guatemala and Colombia have climates especially suited for growing coffee Chile and Zambia have some of the world’s richest copper mines As some have argued, “geography is destiny.” Chile will provide copper and Guatemala will produce coffee, and they will trade When each country has a product others need and it can be produced with fewer resources in one country over another, then it is easy to imagine all parties benefitting from trade 1/10 Absolute and Comparative Advantage However, thinking about trade just in terms of geography and absolute advantage is incomplete Trade really occurs because of comparative advantage Recall from the chapter Choice in a World of Scarcity that a country has a comparative advantage when a good can be produced at a lower cost in terms of other goods The question each country or company should be asking when it trades is this: “What we give up to produce this good?” It should be no surprise that the concept of comparative advantage is based on this idea of opportunity cost from Choice in a World of Scarcity For example, if Zambia focuses its resources on producing copper, its labor, land and financial resources cannot be used to produce other goods such as corn As a result, Zambia gives up the opportunity to produce corn How we quantify the cost in terms of other goods? Simplify the problem and assume that Zambia just needs labor to produce copper and corn The companies that produce either copper or corn tell you that it takes 10 hours to mine a ton of copper and 20 hours to harvest a bushel of corn This means the opportunity cost of producing a ton of copper is bushels of corn The next section develops absolute and comparative advantage in greater detail and relates them to trade Visit this website for a list of articles and podcasts pertaining to international trade topics A Numerical Example of Absolute and Comparative Advantage Consider a hypothetical world with two countries, Saudi Arabia and the United States, and two products, oil and corn Further assume that consumers in both countries desire both these goods These goods are homogeneous, meaning that consumers/producers cannot differentiate between corn or oil from either country There is only one resource available in both countries, labor hours Saudi Arabia can produce oil with fewer resources, while the United States can produce corn with fewer resources [link] illustrates the advantages of the two countries, expressed in terms of how many hours it takes to produce one unit of each good How Many Hours It Takes to Produce Oil and Corn Country Oil (hours per barrel) Corn (hours per bushel) Saudi Arabia 2/10 Absolute and Comparative Advantage Country Oil (hours per barrel) Corn (hours per bushel) United States In [link], Saudi Arabia has an absolute advantage in the production of oil because it only takes an hour to produce a barrel of oil compared to two hours in the United States The United States has an absolute advantage in the production of corn To simplify, let’s say that Saudi Arabia and the United States each have 100 ... COMPARATIVE ADVANTAGE OF VIETNAM’S TEXTILE AND CLOTHING INDUSTRY (SUMMARY) A Research Proposal Presented to the Faculty of Graduate School Southern Luzon State University Lucan, Quezon, Philippines Thai Nguyen University S.R Vietnam In Partial Fulfillment of The Requirements for The Degree Doctor in Business and Administration SUPERVISOR: ASSOCIATE. PRO. DR NGUYEN KHANH DOANH STUDENT NAME: LE ANH TUAN ENGLISH NAME: JOHN Thai Nguyen, 2013 ABSTRACT This Study is the first to attempt a systematic evaluation of the comparative advantage for Vietnam’s Textile and Clothing Industry in the global market. The study is timely as Vietnam has made an extensive effort to change its international trade for some years and the consequent increase in competitive pressures and technology transfers, is expected to have led to a restructuring of the economy such that the composition of Textile and Clothing exports Volumne reflects Vietnam’s comparative advantage in the global economy. The timeliness of the study is also reinforced by the fact that increased trade integration of Vietnam over the past few years is likely to have contributed to a shift in comparative advantage in Textlile and Clothing Industry in the world market. The Study identifies the pattern of comparative advantage using the Balassa (1989) index for export data. The index has been calculated at the sector and commodity level of the Harmonized System of classification. The paper also analyses comparative advantage according to factor intensity. The analysis shows broad in the structure of comparative advantage of Vietnam Textile and Clothing Industry. I do hope that this paper will serve as a useful source and provide valuable reference material for researchers and policymakers associated with and interested in export promotion strategy in Vietnam. Chapter I INTRODUCTION 1.1. Problem Statement The textile industry has long been a pillar of Vietnam’s economy thanks to its advantage in factor endowments and market scale. After severe times, Vietnam has made tremendous efforts to become a main component in the textile industry in Southeast Asia. From humble beginnings since the reunification of its northern and southern regions, Vietnam has become an important member in the global textile market. The textile and clothing industry plays a major role in increasing the country's prosperity. State-owned enterprises make up just 0.5 percent of Vietnam's businesses; however, 75 percent are joint stock or limited companies. The Vietnamese textile industry, with more than 3,800 companies, is the leading export sector. Vietnam’s textile and garment industry has developed rapidly in recent years and has become a vital activity within the country’s economy. Export value of textile and garment products in recent years has been ranking number two in the country’s total export revenue, earning a major source of foreign exchange and contributing significantly to Vietnam’s gross national product and budget. In 2006, the sector exported textiles and garments to the value of 5.8 billion US dollars, making it Vietnam’s second largest export earner after crude oil. Vietnam’s joining the WTO in 2007 provided it tremendous opportunity to develop. Vietnam receives equal treatment and benefits in preferential trade just like other members of WTO; further, it can access world markets conveniently. The textile and garment sector has since taken strong and stable development steps. The trade volume of the textile sector has increased by 7.6 times from 2001 to 2011. Despite the recent global economic downturn, the sector is seeing impressive export performance. Export revenue exceeded 11 billion US dollars in 2010, up 24% against 2009, 14 billion US dollars in 2011, accounting for 16.5% of the country's total export revenue and up 38% against 2010. The production and exports of i Thai Nguyen University Socialist Republic of Vietnam Southern Luzon State University Republic of Philippines Thesis Title: Comparative Advantage of Vietnam’s Textile and Clothing Industry A Research Proposal Presented to the Faculty of Graduate School Southern Luzon State University Lucan, Quezon, Philippines Thai Nguyen University S.R Vietnam In Partial Fulfillment of The Requirements for The Degree Doctor in Business and Administration SUPERVISOR: ASSOCIATE. PRO, DR NGUYEN KHANH DOANH STUDENT NAME: LE ANH TUAN ENGLISH NAME: JOHN THAI NGUYEN, 2013 ii ACKNOWLEDGEMENTS Throughout the course of research leading to the completion of this thesis, I have gratitude to many people, who have provided me with tremendous help and support in one way or another, which I think I cannot possibly acknowledge in full measures. First and foremost, I would like to express my sincere thanks to Vice Associate Pro. Dr.Nguyen Khanh Doanh, my advisor, for his invaluable thoughts, insightful suggestions and useful guidance throughout the thesis works. Sincere appreciations were also to the committee members for their propositions, valuable comments, and constructive suggestions which were of substantial value to this study. I would like to faithfully acknowledge professors of SLSU & TNU at DBA Program at University of Thai Nguyen for their insightful lectures in different subjects that provide me knowledge and technique to develop a good research. My sincere thanks are extended to my entire friends for their meaningful discussion, hospitality and friendships. Finally, I am profoundly grateful to my parents, my wife, my sisters and my brothers, who have been always with me in every situation. They have been table source of encouragement and sharing during my work. LIST OF CONTENTS iii LIST OF CONTENTS Chapter 1: INTRODUCTION 1 1.1. Problem Statement 1 1.2. Objectives 3 1.2.1. General Objective 3 1.2.2. Specific Objectives 4 1.3. Dissertation structure 4 Chapter 2: LITERATURE REVIEW 5 2.1. Theoretical Foundation 5 2.1.1. Definition of comparative advantage 5 2.1.2. Theories of comparative advantage 7 2.1.2.1. Ricardian model 7 2.1.2.2. Heckscher – Ohlin model (H-O) 10 2.1.3. Factors affecting comparative advantage 14 2.1.3.1. Technological Superiority 14 2.1.3.2. Resource endowments 14 2.1.3.3. Availability of credit 16 2.1.3.4. Economies of scale 16 2.1.3.5. Technological Gap (Benefits of an Early Start) and Product Cycle 17 2.1.3.6. Demand Patterns: Demand Considerations 17 2.1.3.7. National and International Policies 17 2.1.3.8. Factors affecting export performance 18 2.1.4. Comparative Advantage framework 21 2.1.5. Competitive advantage 21 2.1.6. Linking comparative advantage and competitive advantage 24 2.1.7. Measuring comparative advantage 27 2.1.7.1. Balassa’s Index of Revealed Comparative Advantage 27 2.1.7.2. The Donges and Riedel Measure 27 2.1.7.3. Wolter Index 28 2.1.7.4. Michaely Index 28 2.1.7.5. Export Share Ratio 29 Chapter 3: RESEARCH METHODOLOGY 30 3.1. Measuring comparative advantage 30 3.1.1. Revealed comparative advantage 30 3.1.2. Trade balance index 31 LIST OF CONTENTS iv 3.1.3. Trade specialization 32 3.1.4. Market share 32 3.1.5. Alternative Specifications of Revealed Comparative Advantage 33 3.2. Analyzing the Structural Stability 34 3.2.1. Stability of Revealed Comparative Advantage 34 3.2.2. Intra-Distribution Dynamics 35 3.3. Indices of Mobility 36 3.3.1. Shorrocks Index (M 1 ) 36 3.3.2. Shorrocks Index (M 2 ) 37 3.3.3. Sommers and Conlisk Index (M 4 ) 37 3.4. Measure of Export Concentration 37 3.5. Trade Compatibility 38 3.6. Modeling the determinants of comparative advantage 38 3.6.1. Model description 38 3.6.2. Model specification 40 3.6.3. Choosing between FEM and REM 41 3.7. Data sources 41 Chapter 4: EMPIRICAL FINDINGS 43 4.1. Vietnam’s Export Performance in Textile THE ROLES OF AGGLOMERATION ECONOMIES AND COMPARATIVE ADVANTAGE IN THE REGIONAL DISTRIBUTION OF FDI IN CHINA NGO QUANG VINH NATIONAL UNIVERSITY OF SINGAPORE 2009 THE ROLES OF AGGLOMERATION ECONOMIES AND COMPARATIVE ADVANTAGE IN THE REGIONAL DISTRIBUTION OF FDI IN CHINA NGO QUANG VINH A THESIS SUBMITTED FOR THE DEGREE OF MASTER OF SOCIAL SCIENCES DEPARTMENT OF ECONOMICS NATIONAL UNIVERSITY OF SINGAPORE 2009 Acknowledgements I am deeply indebted to quite a few people during my study at the National University of Singapore (NUS). First and foremost, I would like to express my special gratitude to my supervisor, A/P Albert Hu, for his continuous support, motivation, patience and guidance. His immense knowledge has helped me overcome numerous obstacles in writing of this thesis. Though the thesis is my independent work, it could have not been possible without his ideas and suggestions. Besides my supervisor, I would also like to thank other professors and staff in the Department of Economics, National University of Singapore. The knowledge provided by other professors has helped me build a solid foundation for my research, and the supports from Department staff have made my study here a smooth process. My sincere thanks also go to many of my friends here in NUS. I have learnt a lot from their guidance, discussions and comments. They are really my friends in need, and indeed. Finally, I owe my loving thanks to my family members, especially my wife and my son. They have lost a lot due to my study abroad. Without their daily support and encouragement it would have been impossible for me to finish this program. i Table of Contents Acknowledgements .................................................................................................................................. i Table of Contents .................................................................................................................................... ii Abstract .................................................................................................................................................. iv List of Tables .......................................................................................................................................... v List of Figures ........................................................................................................................................ vi List of Abbreviations ............................................................................................................................ vii Chapter I: Introduction ............................................................................................................................ 1 1.1 Growth of FDI in China ................................................................................................................ 1 1.2 Sources of FDI in China ............................................................................................................... 4 1.3 Sectoral composition of FDI in China .......................................................................................... 7 1.4 Regional distribution of FDI in China .......................................................................................... 7 1.5 Research questions ...................................................................................................................... 11 Chapter II: Literature Review ............................................................................................................... 13 2.1 Theoretical studies for FDI location choice ................................................................................ 13 2.2 Empirical studies of FDI location choice .................................................................................... 16 2.2.1 Empirical studies for agglomeration effects ........................................................................ 16 2.2.2 Empirical studies for Public Disclosure Authorized Policy Research Working Paper Public Disclosure Authorized 6111 Finance, Comparative Advantage, and Resource Allocation Mélise Jaud Madina Kukenova Martin Strieborny Public Disclosure Authorized Public Disclosure Authorized WPS6111 The World Bank Development Research Group Trade and Integration Team June 2012 Policy Research Working Paper 6111 Abstract The authors show that exported products exit the US market sooner if they violate the Heckscher-Ohlin notion of comparative advantage Crucially, this pattern is stronger when exporting country has a well-developed banking system, measured by a high ratio of bank credit over the GDP Banks thus push firms away from exports that are facing an uphill battle on a competitive foreign market due to a suboptimal use of the domestic factor endowment The results imply a disciplining role for bank credit in terminating inefficient trade flows This constitutes a new channel through which finance improves resource allocation in the real economy This paper is a product of the Trade and Integration Team, Development Research Group It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org The author may be contacted at mjaud@worldbank.org The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished The papers carry the names of the authors and should be cited accordingly The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors They not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent Produced by the Research Support Team Finance, Comparative Advantage, and Resource Allocation Melise Jaudy Madina Kukenovaz Martin Striebornyx Keywords: resource misallocation, …nance, comparative advantage, export survival JEL classi…cation: F11, G30, O16 We would like to thank Jean Imbs, Tibor Besedes, Chad Bown, Marius Brülhart, Alan Deardorf, Reto Föllmi, Andrei Levchenko, Mathias Thoenig, a World Bank referee, and participants of the the 2011 EIIT Conference, the Spring 2012 Midwest Meeting in International Trade, and two seminars at the University of Michigan - Ann Arbor for very helpful comments and suggestions The views expressed here are those of the authors and not necessarily represent the views of the World Bank, its Executive Board or member countries All remaining errors are ours This paper received …nancial support from the Swiss National Fund y World Bank; MNACE, EPOL, E-Mail: mjaud@worldbank.org z University of Lausanne; E-Mail: madina.kukenova@unil.ch x University of Lund and University of Michigan - Ann Arbor; E-Mail: mstriebo@umich.edu 1 Introduction One of the most distinguishing features of economies or economic systems is their di¤ering ability to allocate the available resources in an e¢ cient way Maybe surprisingly, the sources and consequences of resource misallocation have only recently come to the fore of the macroeconomic and development literature (Banerjee and Du‡o 2005, Restuccia and Rogerson 2008, Hsieh and Klenow 2009).1 This new line of research usually focuses on the signi…cant heterogeneity of marginal products or rates of returns to production factors within economies Another important aspect of resource misallocation has so far not caught much attention: export patterns not congruent with the comparative advantage of a given country Our paper tries to …ll this gap It also examines the role of …nance in attenuating this kind of factor .. .Absolute and Comparative Advantage However, thinking about trade just in terms of geography and absolute advantage is incomplete Trade really occurs because of comparative advantage. .. absolute and comparative advantage Saudi Arabia needs fewer worker hours to produce oil (absolute advantage, see [link]), and also gives up the least in terms of other goods to produce oil (comparative. .. of oil at maximum and zero corn (point A), or 25 bushels of corn and zero oil (point B) It can also produce other combinations of oil and corn if 3/10 Absolute and Comparative Advantage it wants