The Neoclassical Heckscher-Ohlin model assumes that all producers of any industrial product has knowledge of, and may avail itself of the same production technology available to producers in any other country

Question

Many have flagged this identical technology assumption as unrealistic. During the past half century, the relative importance of Multinational Corporations (MNCs) in world trade has steadily increased. How would this trend affect the realism of the "identical technology" assumption?

Answer 1

Noting that MNC plants tend to use more labor intensive production processes in countries where labor tends to be relatively cheap (both in "low" tech, e.g., Nike, and "high tech," e.g., Motorola), one may argue that MNCs use different technologies in developing countries. However, this is a gross misunderstanding of the identical technology assumption. It is axiomatically obvious that if the same MNC is producing something in both labor abundant and labor scarce using different processes, it nevertheless has knowledge (intimate knowledge in the case of proprietary patented processes) of available technology. The fact that the MNC may choose not to apply the same degree of capital intensity in environments with greatly different relative factor prices in no way lessens the fact that the Heckscher-Ohlin identical technology assumption is strengthened due to the growing relative strength of MNCs in developing countries. An additional fact that strengthens this argument is that, as compared to the early 1950s, a growing proportion of MNCs are themselves based in developing countries, such as China and Brazil.