22 countries are maturing Even though technology is still at a high level and, in many

cases, continuously evolving, it becomes fairly standardised internationally, enabling mass production. The product cycle is at the stage where high levels of R&D expenditure and technological knowledge are not very critical but labour with the necessary skill (human capital) to operate the production facilities is gradually becoming a dominant factor of comparative advantage. In establishing some industries, equipment and facilities and vast investment of physical capital may be very important also, but a newly industrialising country may lack these. However, provided that capital in the form of finance is internationally mobile and the equipment and facilities are available in the international markets, this may not represent a major obstacle in establishing those industries.

As the technology in the human capital-intensive industries becomes standardised, relatively high wage rates in developed countries appear to be unfavourable to the maintenance of comparative advantage in these products. By contrast, in some ADCs, technological and scientific knowledge and R&D expenditure are still in relatively scarce supply but other inputs such as, most importantiy, labour with high levels of education and skill is relatively cheaply available, which may enable production at lower costs than in developed countries. In an effort to maintain their market shares abroad, firms in developed countries initiate offshore production and direct foreign investment, while also investing in upgrading or developing the current production technology. In ADCs, at the same time, continuously growing demand for the products provides incentives to some domestic firms to begin production based on imitation, the actual establishment of a subsidiary or an affiliate plant or through a turnkey technology import. As the technology becomes embodied in the workers and the scale of production becomes greater, lowering production costs, the firms in ADCs eventually displace developed country exports, initially in the ADCs' own markets.

In the international market, the ADCs which have successfully developed some human capital-intensive industries compete with each other and with the developed countries that originally transferred the technology to them. Even if, given the level of technology, higher labour productivity and/or lower unit labour costs form the main determinants of comparative advantage, it is also likely that the technologies in the human capital-intensive industries are continuously evolving and that there is more technological development and introduction of newer products.^' Such technological development may

21. The major technological advance may also generate a stream of process innovations (Nelson and Norman, 1977). This can happen in a labour saving way even without significant changes in product quality or specification. If this kind of technological improvement in production process requires substitution of larger parts of previous production facilities into new ones, newcomers in develq)iiig countries may have an advantage in setting up the new production facilities. If the new technology proves highly immobile across borders, or very costly to transfer, some developing countries may import old plant and technology from developed countries to commence domestic

occur mainly in developed countries, where there is a stronger capacity for R&D investment and scientific and industrial leadership, in an effort to overcome or compensate for the loss of comparative advantage in the human-capital intensive industries. Some ADCs which have absorbed the imported technology and accumulated scientific and technological capacity will also invest in technological development in those industries to sustain comparative advantage. In such a case, it is not only skilled labour but also the ability to improve or develop technology that provide important sources of longer run comparative advantage.

As economic growth proceeds, an ADC may lose competitiveness eventually in unskilled labour-intensive products but become more competitive in human capital- intensive sectors at a given set of world price ratios and technology levels. Production and export menus include higher capital-intensive and technically more complex products. At the same time, a society's demand pattern becomes more sophisticated, shifting imports towards more complex and technologically advanced goods and services.^^ Further income growth and accumulation of scientific and technological knowledge will give rise to R&D capacity and lead to the creation of comparative advantage in some technology-intensive industries. Increasing wage rates, however, gradually reduce comparative advantage in some human capital-intensive products.

An ADC eventually becomes a net exporter of some human capital-intensive products, increasing imports of some labour-intensive and technology-intensive products and industrial raw materials. A qualification which has to be made with respect to a trade pattern is the existence of intra-industry trade, while comparative advantage theory predicts inter-industry trade between countries with different factor proportions. As many studies on trade theory incorporating different forms of market structures imply, the existence of scale economies and imperfect competition is the most important source of intra-industry trade in differentiated or even homogenous goods. Many large-scale human capital-intensive industries booming in ADCs are subject to some forms of scale economies and their market structure involves imperfect competition.^^ In these industries, an ADC will engage in intra-industry trade with other ADCs or with developed countries, as its rapid economic growth and industrialisation not only reduces its dissimilarity with developed countries in factor proportions but also result in overlapping patterns of production and consumption with those of developed countries in

production.

22. The growth and industrialisation of the ADCs, particularly of countries with poor per capita resource endowments, also points to growing imports of raw materials for capital-intensive relative to labour- intensive industries and rising import shares for industrial raw materials over agricultural goods (Drysdale, 1988).

23. See Appendix 1 for a brief review of studies on intra-industry trade and discussion of the relationship between comparative advantage and intra-industry trade in an ADC.

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