Few would disagree with the positive economic effect that trade and foreign direct investment has had on the development of the four East Asian economies. The expansion in trade has largely been facilitated by the constant inflow of foreign direct investment. Exports, especially industrial exports, have often been explained by these economies' comparative advantage. Judging from the export performance of the four East Asian economies, it can be concluded that their comparative advantage has changed over the decades, and export expansion has been supported by different manufactured exports. This chapter focuses on the role of trade and foreign direct investment in the growth of the four East Asian economies. One of the roles they have played is in the changing nature of comparative advantage. It has also been argued that the external sector supplements domestic growth. As such, it forms a necessary condition for growth, while domestic prerequisites are both necessary and sufficient conditions.
The pure theory of comparative advantage argues that trade becomes feasible when nations specialize in products which have the lowest marginal cost of production for them. This necessarily means that resources are channeled from lines of production with comparative advantage to those with comparative disadvantage. If an economy has more than one product with comparative advantage, a “chain of comparative advantage” will emerge, with goods listed in descending order in terms of relative efficiency of production. The development experience of the four East Asian economies, however, has shown that there is a “dynamic” aspect to comparative advantage. Over the years, new export products with comparative advantage have emerged, developed, and expanded and then replaced exports on the existing list. There are various reasons for, and channels of, developing new export items with comparative advantage. One is changes in global demand, which gives rise to new investments. Secondly, new developments in production techniques, including automation and technological applications and innovations, discovery and designs can give rise to new industries that lead to new comparative advantages in exports. An increase in the value-added and product diversification can also contribute to changes in the comparative