2 management - School of International Business and ...

149 The Puzzle of Globalization
to describe the system of political economy that sought to enrich the country by restraining im-
ports and encouraging exports«[LaHaye, 2008]. The spatiotemporal coincidence of liberalism and
industrial revolution created the basis for a new thinking on the value of international trade. The
founders of the modern economic theory – Adam Smith, David Ricardo, John Stuart Mill [Sandmo,
2011] – argued that free trade initiated by absolute (Smith) or comparative advantage (Ricardo) and
allocated by the »law of one price«(Mill) is beneficiary for all countries. Ricardo’s theory of com-
parative advantage experienced an important advancement by explicitly including the markets for
production factors. The Swedish economists Eli Heckscher and Bertil Ohlin [Ohlin, 1933] developed
the factor proportion theorem which explains why labor rich (capital rich) countries export labor in-
tensive (capital intensive) goods. The growing complexity of trade between industrialized countries
after World War II motivated economists [Grubel/Lloyd, 1975; Brander, 1981; Helpman/ Krugman,
1987] to adapt crucial assumptions of the neo-classical Heckscher-Ohlin model to the empirical
observation of intra-industry, intra-firm trade, increasing returns to scale, monopolistic competition.
The latter assumptions are labeled as New Trade Theory [Krugman, 1979; Dixit/Norman, 1980].
From a dynamic point of view the pattern of trade in technologically advanced industries followed
the life cycle of products. The International Product Life Cycle Hypothesis [Vernon, 1966] has been
another attempt to overcome some restrictions of the Heckscher-Ohlin model. By broadening the
new approaches to a concept of competitiveness, Porter developed the Theory of National Com-
petitive Advantage [Porter, 1990]. The role of space in international trade was modeled for the first
time by Tinbergen’s gravity approach [Tinbergen, 1975] and Krugman’s New Economic Geography
[Krugman, 1991]. Based on econometric models (e.g. computable general equilibrium models –
CGE) a huge number of studies support the hypothesis that »distance/proximity matters«. A more
controversial academic discussion is still going on regarding the link between international trade
and growth. Theoretical results show that under the given conditions trade supports growth and
finally convergence to a steady state [e.g. Bardham, 1965; Johnson, 1971; Deardorff, 1973]. The
empirical literature presents positive and negative correlations between trade and growth [Frankel/
Romer, 1999; Rodriguez/Rodrik, 2000]. The controversy continues with studies on the trade-in-
equality nexus [Cline, 1975 and 1999] and results in a political-economy discussion on trade and
poverty [Dollar/Kraay, 2004).
The negative experiences of drastically shrinking international trade during World War I and II due
to protectionists policies in Europe and North America initiated a huge number of theoretical studies
analyzing trade policy measures [e.g. Corden, 1971]. The following sub-chapters pick up the basic
models of the different approaches.
3.2.2 A SIMPLE MODEL OF FREE TRADE: INTER-INDUSTRY TRADE
The basic concept of the neo-classical model of comparative advantage is build on two countries,
two goods markets, two factor markets. Therefore, the absolute size of countries is not relevant
for the functioning of the model. It includes all assumptions of the model of perfect competition as