International Human Resource Management-MJ Version

TABLE 1.1

Absolute and relative comparative cost advantages

This theory takes us back to the founding father of modern economics: Adam
Smith. In his book An Inquiry into the Nature and Causes of the Wealth of Nations
(1776), Smith explains that the division of labour can lead to increased pro-
ductivity, because each person does what he or she is best at or can produce
most efficiently. This applies at every level, for example within families or
within a country as a whole. An efficient division of labour between countries
is present whenever location-specific advantages, such as the presence of
certain natural resources, make it possible for one country to produce a certain
product more cheaply than another.

It is the maxim of every prudent master of a family, never to

attempt to make at home what it will cost him more to make than

to buy. The tailor does not attempt to make his own shoes, but

buys them from the shoemaker...What is prudence in the conduct

of every private family, can scarce be folly in that of a great king-

dom. If a foreign country can supply us with a commodity

cheaper than we ourselves can make it, better buy it of them with

some part of the produce of our own industry, employed in a way

in which we have some advantage. (Adam Smith, 1776: 424–425)

There was one problem with this theory, however. What if a country has no
location-specific advantages and therefore no cost advantages? Will it still be
in a position to trade with other countries? And even if it is, would it not end
up importing far more than it exports, so that an ever increasing amount of
money would leave the country?

12 International Human Resource Management

Selected indicators of FDI and international production, 1982–2001

Value at current prices

(billions of dollars) Annual growth rate (%)

1986– 1991– 1996–

1982 1990 2001 1990 1995 2000

FDI inward stock 734 1874 6846 15.6 9.1 17.9
FDI outward stock 552 1721 6582 19.8 10.4 17.8
Sales of foreign affiliates 2541 5479 18517 16.9 10.5 14.5
Employment of foreign
affiliates (thousands) 17987 23858 53581 6.8 5.1 11.7

Source: adapted from UNCTAD, 2002