Country-Similiarity Theory
Country-Similiarity Theory
When we observe actual trade patterns, we see that most of the world's trade
occurs among countries that have similar characteristics. Most trade occurs
among industrialized countries, which have highly educated populations and
are located in temperate areas of the globe. Thus, overall trade patterns seem to be at variance with the traditional theories that emphasize country-by-country differences.
The fact that so much trade takes place among industrial countries is due to the growing importance of acquired (product-technology) advantage as opposed to natural advantage in world trade. The country-similarity theory holds that, having developed a new product in response to observed market conditions in the home market, a producer will then turn to markets that are perceived to be the most similar to those at home. In other words, consumers in industrial countries will have a high propensity to buy high-quality and luxury products, whereas consumers in lower-income countries will buy few of these products.
Although the markets within the industrial countries might have similar demand characteristics, there are differences in how these countries specialize in order to gain acquired advantages. For example, the British have excelled for some time in biochemistry and applied engineering, the Germans in synthetics chemistry, and the French in pharmacology. It is also known that substantial country-to-country differences exist in apportionment of R&D expenditures, thus giving rise to the development of different technical and product capabilities in different industrial countries. Furthermore, those domestic industries for which there is intense competitive rivalry are likely to be the ones that innovate faster and develop international advantages.
When we observe actual trade patterns, we see that most of the world's trade
occurs among countries that have similar characteristics. Most trade occurs
among industrialized countries, which have highly educated populations and
are located in temperate areas of the globe. Thus, overall trade patterns seem to be at variance with the traditional theories that emphasize country-by-country differences.
The fact that so much trade takes place among industrial countries is due to the growing importance of acquired (product-technology) advantage as opposed to natural advantage in world trade. The country-similarity theory holds that, having developed a new product in response to observed market conditions in the home market, a producer will then turn to markets that are perceived to be the most similar to those at home. In other words, consumers in industrial countries will have a high propensity to buy high-quality and luxury products, whereas consumers in lower-income countries will buy few of these products.
Although the markets within the industrial countries might have similar demand characteristics, there are differences in how these countries specialize in order to gain acquired advantages. For example, the British have excelled for some time in biochemistry and applied engineering, the Germans in synthetics chemistry, and the French in pharmacology. It is also known that substantial country-to-country differences exist in apportionment of R&D expenditures, thus giving rise to the development of different technical and product capabilities in different industrial countries. Furthermore, those domestic industries for which there is intense competitive rivalry are likely to be the ones that innovate faster and develop international advantages.
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