CHANGING COMPARATIVE ADVANTAGE OF SINGAPORE'S MANUFACTURING SECTOR

Abstract

Economies are in a state of change because of structural forces such as technological advances, the accumulation of capital, the growth of skilled labour and changes in tastes. Therefore, the economists' thinking regarding the determinants of trade between countries has come to incorporate the phenomenon of changes in the patterns of comparative advantage. The interaction between determinants of comparative advantage is more complex than they were originally thought. Comparative advantage itself has come to be regarded as a dynamic concept. The forces that determine comparative advantage have been· modified in two ways. Firstly, the determinants of comparative advantage now incorporate the role of human capital, research and development, technology transfer and product differentiation. Secondly, the significance of the international movement of these inputs and of unskilled labour and capital is now better appreciated. This exercise attempts to examine the above statements, using the manufacturing sector of Singapore. Besides those conventional factors that have been considered in most literature, we would also explore the possibility of the government's and foreign participation's effects on the changing patterns of comparative advantage of Singapore's manufacturing sector. It is an attempt to test competing traditional and modern trade theories to ascertain empirically the determinants qf the comparative advantage of Singapore's manufacturing. For instance, the idea of.foreign direct investment might be contrary to the assumptions qf Heckscher-Ohlin but it is not totally inconsistent with the technological gap and product cycle theories. There were many studies on comparative advantage done for developed countries but few were done for developing countries whose comparative advantage patterns are changing rapidly. This exercise is undertaken for the purpose of determining the possible determinants of the changing patterns of comparative advantage of Singapore's manufacturing sector. It is also a first attempt to capture the role of government in juxtaposition with the other trade theories. The manufacturing sector was chosen as it has been among the largest contributors to Gross Domestic Product in Singapore for many years. As the economy matures, one would expect the manufacturing sector's comparative advantage to be explained by both the Heckscher-Ohlin theory, as well as the other theories that incorporate technology changes, product differentiation and economies of scale. In addition, because of the smallness and openness of the Singapore economy, the government and foreign participation also influence the comparative advantage of the manufacturing sector. That is, dynamic comparative advantage is not waiting to be changed; there are interventions by the government who brings about structural changes that influence the patterns of comparative advantage.