HECKSCHER-OHLIN MODEL The Heckscher-Ohlin is an expansion of the Ricardian model. The H-O model incorporates a number of realistic characteristics of production that are left out of the simple Ricardian model. The HO model differs from the Ricardian model along two dimensions. Firstly, it adopts a more realistic framework as compared to Ricardian model by allowing for two factors of production; labor and capital. Secondly, in the Heckscher-Ohlin model comparative advantage is determined by differences in endowments of factors across countries assuming production technology to be the same. The first innovation implies that the production possibility frontier is going to be concave and hence result in increasing opportunity costs. As a result, …show more content…
In addition to the usual basic assumptions (no transport costs, free trade, perfect competition, international immobility of factors) there are the following: 1. The production functions exhibit positive but decreasing returns to each factor (i.e., positive but decreasing marginal productivities) and constant returns to scale (i.e., first degree homogeneity). They are internationally identical, but, of course, different between the two goods, that is the production function of iron ore is the same in India and China , and is different from that of mobile phones (which is identical in the two countries). 2. The structure of demand, that is the proportions in which the two goods are consumed at any given relative price, is identical in both countries and independent of the level of income i.e. the preferences are homothetic. 3. Factor-intensity reversals are excluded. In the previous section of our paper, we have shown how there is a redirection of FDI inflow to India from China. This FDI is taken in this model as capital investment(increase in capital for India and an equal decrease of capital from China). The following table shows the data of labor force and capital investment in terms of machinery and other …show more content…
Solving the above two equations, we get ; (2) ; (3) China is losing the inflow of FDI to India. This can be seen as a reduction in KO such that From (2), From (3), This results in a decrease of production of mobile phones and an increase in the production of iron ore. Since mobile phones are finished goods and iron ore is a raw material, mobile phones garner more revenue in an economy and thus decrease in its production results in GDP loss for China. This FDI that China loses to India results in an unbiased growth of factor endowments i.e. they are increasing at the same rate Thus, we can write (2) and (3) as (Substitute QM = QI = 1 Since India is a labor surplus economy, LO > KO ) Thus, in unbiased growth, capital-intensive sector grows at a faster rate than labor-intensive sector and since capital-intensive sector is a more revenue garnering sector, India gains from this unbiased growth in factor endowments seen due to the FDI redirection from
The fact that majority of the capital funds was in the form of portfolio capital instead of foreign direct investment (FDI) had also worsen the situation. The ratio of portfolio capital to FDI had increased substantially from 1:1.3 in 1990 to 1:6.5 in 1993. Given the volatile nature, portfolio capital tends to respond with greater speed to changes in the environment.
Wei, W. (2005). China and India: Any difference in their FDI performances? Journal of Asian Economics, 16(4), 719-736. doi:10.1016/j.asieco.2005.06.004
C/E/110. FDI in emerging economies: the case of EECThe paper discusses the importance of inbound FDI for emerging economies. Among the considered benefits are economic growth, the growth of internal market, technological sipll -overs and access to cheap managerial know-how. The paper also considers the motivational forces that push and pull investors to stream their capitals into particular destinations and business areas.
The article also give snap shot of the foreign companies who misjudge the Chinese culture, competition, size the market, and some other factors, have been badly affected by investing in china.
Wang, Y. (2013). Fiscal Decentralization, Endogenous Policies, and Foreign Direct Investment: Theory and Evidence From China and India. Journal of Development Economics. 103 pp.107-123.
We all know that the foreign investment is a necessary part of global expansion. Many developed countries prefer to invest developing countries. For instance, the US has invested much more fund in China. Since the initiation of its market reforms in the 1980’s. China has been a preeminent recipient of foreign direct investment (FDI). Until 2011, there is over $1.2 trillion have been invest in China as foreign direct investment, it made Chinese industries has been transformation, and contributed enormously to the nation’s industrial output. In addition, the more foreign manufactures, the more Chinese subsidiaries have dominated (Wei, Xiao & Yuan, 2014).
In the year 2007, China and India ranked first and second respectively in the list of ideal foreign direct investment (FDI) destinations, according to A T Kearney, a global strategic management consulting firm (The Press Trust of India Limited, 2007a). The two nations, because of their similarities in geopolitical, economic and demographic aspects, are often compared with each other. To determine which one is more attractive for businesses to expand to, this essay will examine the business environment of both countries from the following perspectives: political/legal, economic, socio-cultural and technological.
There are many assumptions of the theory. Both countries in model have identical production technology. It assumes that the rates of availability of resources are same in different countries. What’s more, it assumes that the production output must have constant return to scale (CRS). In reality, the assumptions of the H-O model cannot be satisfied. In 1954, an econometric test by Wassily W. Leontief of the H-O model found that the US, despite having a relative abundance of capital, tended to export labour-intensive goods and import capital-intensive goods (wiki, 2012). This result is known as the Leontief paradox and has been explained in terms of the quality of labor input rather than just labor-hours of work.
In recent economic climate the link between technology transfers and Foreign Direct Investment seems to be essential for the Multinational Corporations. The main objective of MNCs is to maximize its profits. This requires them to produce the goods and services at the lowest possible cost (fixed and variable) by exploiting the resources of the developing countries apart from their home country (Pool and Stamos 1990). The channels of international technology transfer and their importance of growth have been studies extensively in 1990s. The study identifies three principal channels of international technology spillovers. The first is the direct transfer of technology via international licensing agreement (Eaton and Kortum 1996) on the contrary this source is considered less prominent as most valuable technologies are not available on license (World Investment Report 2000). The second is FDI from developed countries to developing countries as it is considered the cheapest and most reliable technique as a spillover (Blomström and Kokko 1997). The third is technology transfer through international trade where import and export of intermediate goods and capital products are exchanged (Markusen 1989, Clerides, Lach and Tybout 1997). On the other hand, it is seen that MNCs do not encourage spillovers due to (a) transmission of technology to their subsidiaries abroad. (b) Technologies that does not support the host country’s environment. (c) Maintain a control over the technology by reducing the spillovers and encouraging import. (d) Maintaining advanced technology than developing countries through Intellectual Property Rights (Aitken and Harrison et al. 1999). As an emerging economy, India has a huge presence of multinational corporations...
...titutional investors as a way to halt the rupees’ depreciation puts short-term stagnation in FDI and helps country to make an impression on the world wide level through liberalization and globalization, paving way to retail sector.
Wilson, Beth Anne, & Keim, Geoffrey N. (2006). India and the Global Economy. Business Economics, 41(1), 28-36.
Foreign Direct Investment (FDI) measures the investment activities of MNCs, and it can be formally defined as "ownership of assets in one country by residents of another for purposes of controlling the use of those assets".
FDI inflow is divided into four (4) main sectors: agriculture, industries, infrastructure and tourism. FDI in the agricultural sector amounted to US $ 794.5 million in 2011, US $ 556.6 million in 2012 and a sharp increase of US $ 1,128.8 million in 2013. However, it started to decline of US $ 264.7 million in 2014 and US $ 482.6 million FDI flows in the infrastructure sector, which amounted for US $ 3,129.8 million in 2015 compared to the industrial sector, amounted for US $ 919.3 million and the tourism sector represents only US $ 111.9 million in
...ountries, in the sense that both countries have resources which undoubtedly, through trade, could benefit both countries. You still may be a little confused by the ideas of comparative/ absolute advantage, so, to sum up these ideas I will say they differ primarily in terms of the value either country has to consider when making decisions regarding goods/services. Like Mr. Lincoln needed to do when determining who should build his rails. I disagree with Mr. Lincoln because I have taken the time to understand the opportunity cost, and the advantages as well as disadvantages associated with trade, labor and the fundamentals of economics. In saying this, I do understand that it is those before me, such as Mr. Lincoln who I give gratitude to because now we are able learn from their mistakes as well as determine which economic decisions are most valuable for our nation.
The Associated Chambers of Commerce and Industry of India. (2012). India’s Experience with fdI: Role of a Game Changer. Retrieved from http://www.assocham.org/arb/general/Indias_Experience_with_FDI_Role_of_a_Game_Changer.pdf