Introduction to Regional Economic Development

Introduction to Regional Economic Development

• Regional economic development relies on spatial interaction between regions.
• This interaction involves the movement of goods, services and people.
• International trade theory explores patterns and characteristics of trade between nations.
• This theory focuses on comparative and competitive advantage.

Comparative Advantage

• David Ricardo introduced the concept in the 19th century.
• It describes the ability of an economy to produce goods and services at a lower opportunity cost than competitors.
• This lower opportunity cost leads to a competitive advantage for a company or region, allowing them to sell goods at a lower price and increase sales.
• Comparative advantage is often confused with absolute advantage, but they are different.

Comparative Advantage (continued)

• Absolute advantage refers to the ability of a country or region to produce a good or service at a lower cost per unit.
• However, comparative advantage is about the ability to produce goods or services at a lower opportunity cost, not necessarily a lower absolute cost.
• Opportunity cost refers to the benefits that are lost when choosing one alternative over another.

Examples of Comparative Advantage

• Saudi Arabia has an absolute advantage in oil production because it takes fewer hours (4) to produce a barrel of oil compared to the United States (7 hours).
• The United States has an absolute advantage in corn production because it takes fewer hours (1) to produce a bushel of corn compared to Saudi Arabia (4 hours).
• Comparative advantage considers the opportunity cost. For example, if Libya uses 100 worker hours to make 100 barrels of oil or 25 bushels of corn, it has a comparative advantage in oil.

Factors Influencing Comparative Advantage

• Resource Endowments: A country has a comparative advantage in producing goods that use its abundant resources. Examples are abundant natural resources, skilled labor,etc
• Demand Patterns: High demand in both domestic and international markets is crucial for gaining a comparative advantage.
• National/International Policies: Policies related to infrastructure, export promotion, education, and R&D are important. Policies from organizations like IMF and WTO can be beneficial or detrimental to industries in certain regions.
• Technological Superiority: Advanced technology allows efficient quality production for a region, improving its comparative advantage. Economies of scale lower production costs in such regions.

Competitive Advantage

• There's no single definition for competitive advantage.
• One definition links competitive advantage to more competitive markets (lower barriers to entry, more firms)
• Another definition describes competitiveness as involving low prices compared to rivals, a strong drive to win, or high demand and superior quality.
• A nation's competitiveness depends on its capacity for industry innovation and upgrading.

Factors Influencing Competitive Advantage

• Factor Conditions: These are factors like labor and capital, but in a specialized and upgraded variant, rather than traditional resources. Examples include highly skilled labor, world-class scientific research, and specialized infrastructure.
• Demand Conditions: The character and nature of demand within a home market is important more than the mere size of that market. Sophisticated and demanding consumers help drive innovation.
• Related and Supporting Industries: Industries that support each other are important. Internationally competitive related industries fostering innovation are advantageous.
• Firm Strategy, Structure, and Rivalry: The competitiveness of firms within an industry is critical. This includes domestic rivalry that drives innovation.

Linking Comparative and Competitive Advantage

• For intra-industry trade among developed countries, firm-level forces dominate.
• In trade between developed and developing/resource-rich countries, country-level forces (comparative advantage) are stronger.

Importance of Regional Competitiveness

• Globalisation has driven increased competition between enterprises, nations, and regions.
• Knowledge of measuring and enhancing local competitiveness grows, resulting in indexes and league tables.
• Economic policies and academic research promote the concept of regional competitiveness.