The issues

Many less-developed countries (LDCs) are shifting the emphasis of their industrialization strategies from import substitution to promotion of manufactured exports. To implement the new strategy the government has a variety of tools at its disposal. Some of these (including the exchange rate and tax and credit subsidies) are designed primarily to guide the behavior of private enterprises; others (including direct commands and bonus schemes) are designed primarily to alter the behavior of existing public enterprises. In addition, a government could create new public enterprises. Although the set of tools aimed at private enterprise has been extensively analyzed, the role of public enterprise in manufactured exports has been almost totally neglected. This chapter therefore asks what the role of the public-enterprise sector ought to be in promoting manufactured exports and how policy instruments might be manipulated to achieve this potential.

To help answer these questions we extend the list of determinants of comparative advantage to include marketing and institutional factors. The Heckscher-Ohlin theorem explains comparative advantage in terms of relative resource endowment and predicts labor-intensive manufactured exports from LDCs. This theory has been shown to have broad predictive ability, particularly when modified to recognize the human-capital component of skill-intensive manufactured exports and the natural-resource component of other manufactured exports. Other factors that have been shown useful in explaining variance for particular products and countries include such commodity and national attributes as: scale economies (both static and dynamic), whether a good is for final consumption or intermediate use, technological lag, product differentiation, price elasticity of demand, preference similarity, physical distance, and entrepreneurs’ willingness to take risk.