3.3.5 Criticism of the Heckscher-Ohlin theory and the Leontief paradox
Although these theories provide a general explanation of why nations trade, they have been criticised on several grounds:
- Nations do not initiate trade: this is done by individuals or individual firms within nations.
- There must be perfect information and perfect competition between trading partners, which is never the case.
- They are limited because they do not look at either the transfer of goods or direct investments.
- They do not recognise the influence of technology and expertise in the areas of marketing and management.
Consequently, a number of other theories have arisen which look at the reasons why firms enter into trade or foreign investment. Before considering some of the more recent theories, read Hill's (2005) discussion of the Heckscher-Ohlin theory and Leontief paradox.
In your text
Hill 2005, Chapter 4, pp. 157-159.
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