labour force (for example, Western nations). Other countries have relatively little
capital and a large labour force (for example, most of the developing nations).
Note that it is the relative position of these production factors with respect to one
another that counts. We would not, for example, say that Zaire has more labour
than the US (which is untrue) or that it has more labour than capital (how would
one go about measuring that?). We can, however, say that Zaire has more labour
available per quantity of capital than the United States does.
Production factors available in relatively large quantities will be inexpen-
sive, and vice versa. (For the time being we will not consider the demand con-
ditions. A country may, for example, have absolutely no demand for a domestic
good produced with scarce production factors, resulting in a low price.) In a
country that possesses a relatively large amount of capital and very little labour,
capital-intensive products will be cheap and labour-intensive products expen-
sive. The reverse will be true for a country with a relatively small amount of
capital and a large labour force. The same arguments can be offered for the
production factor ‘land’. The impact on international trade is that
commodities requiring for their production much of [abundant
factors of production] and little of [scarce factors] are exported in
exchange for goods that call for factors in the opposite propor-
tions. Thus indirectly, factors in abundant supply are exported
and factors in scant supply are imported. (Ohlin, 1933: 92)In global terms, we can explain international trade flows rather well using this
theorem. Japan, a country with a relatively limited amount of land, imports
many of its primary products. Third World countries with a relatively large
body of (unskilled) labour export labour-intensive products such as textiles and
shoes.
There are, however, two postwar trends that have presented a considerable
challenge to the H–O theorem. Firstly, there is the fact that a large and increas-
ing share of international trade takes place between countries with similarly
large incomes. Secondly, a large and increasing share of international trade
consists of two-way trade involving similar manufactured products (known as
intra-industry trade). As a result, new theories of trade have been introduced
which reject country-specific factors to a certain extent and which turn instead
to sector- or company-specific factors that might lead to a strong competitive
position. The key term in such new theories is ‘economies of scale’.
Economies of scaleWe have not yet mentioned an important assumption underlying the classic
trade theories: yield remains constant regardless of the scale of production.
In other words, the average cost per product will remain the same. In actual
practice, however, we see economies of scale in many branches of industry – as
14 International Human Resource Management