Strategic Management: Formulation and Implementation

Heckscher-ohlin Theory Of Factor Endowment

The Heckscher-Ohlin theory states that international and interregional differences in production costs occur because of differences in the supply of production factors:

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 proportions. Thus indirectly, factors in abundant supply are exported and factors in scanty supply are imported (Ohlin, 1933).

These simple statements lead to an important conclusion: under free trade, countries export the products that use their scarce factors intensively and imports the products using their scarce factors intensively.

A country is labor-abundant if it has a higher ration of labor to other factors than does the rest of the world. A product is labor-intensity if labor costs are a greater share of its value than the are of the value of other products.

Those goods that require a large amount of the abundant - and thus less costly -factor will have lower production costs, enabling them to be sold for less in international markets.

For example, India, which is relatively well endowed with labor compared to Switzerland, ought to concentrate on producing labor-intensive goods; Switzerland with relatively more capital than labor, should specialize in capital-intensive products.

The Heckscher-Ohlin theory explains some trade patterns quite well, but recent trends hint that the industrial countries are becoming more similar in their endowments, suggesting that this theory, which emphasizes international contrasts in endowments, may slowly become less relevant.