How much trade and FDI theories help in analyzing competitiveness-related issues?
How much trade and FDI theories help in analyzing competitiveness-related issues?

Summary/Abstract: Ever since the famous quibble of Paul Krugman [1997] competitiveness is seen as a „dangerous obsession”. As is so often the case, an intellectually valid statement, torn out of its original context, leads a life of its own and results in interpretations completely out of line with its original meaning. The latter, in Krugman’s case, has been an insight that international trade is by no means a zero sum game, thus the gain by one country does not necessarily equals the loss by another. While at the level of economic theory this is nothing more and nothing less than a rehash of the original Ricardian theory of comparative advantage – one of the fundamental (and popularly least understood!) inventions of economics – at the level of policy-making the statement is anything but trivial. Krugman’s exclamation was triggered by legitimate concerns about growing protectionism in the US at that time directed against the relocation of some labor-intensive industries to Mexico. A decade later it could have been leveled against outsourcing of services to India and other low-cost countries. But is competitiveness indeed just a buzzword for ignorant politicians? At the level of economic theory nations do not exist, only localities, firms and the global interchange. Therefore, an existence of the national economy is an artefact at best, bringing about only distortions in the smooth process leading to general equilibrium, at least for the microeconomically founded modern macroeconomics. For that reason mainstream economic theory does not find a place for competitiveness on other than the firm level. And even on that level the usual concern is unit labor costs and an existence or nonexistence of distortionary governmental practices, such as taxation, licensing, arbitrary customs’ duties and other regulations and administrative decisions, rendering directly unproductive activities, such as rent-seeking, profitable [Bhagwati,1998].

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