Comparative Advantage and Competitive Advantage: An Economics Perspective and a Synthesis

There is a considerable amount of controversy about the model(s) of comparative advantage and its applicability to international business, in particular as a guide to the success of nations and/or firms in international markets. This perception (or understanding) of inapplicability of the model(s) of comparative advantage has lead international business experts to develop new models, or what may be called frameworks, for analyzing the potential for success of firms and/or nations in international markets. These frameworks are popularly known as models of “competitive advantage”. In the author’s view, the model(s) of comparative advantage are too general to be dismissed altogether in this manner. While they may not be applicable to all circumstances in international business, they are valid models and can still offer meaningful predictions in a variety of circumstances. Furthermore, the models of comparative advantage used together with models of competitive advantage have the potential of offering a much richer analysis of international trade/business, normally not available with either the model(s) of comparative advantage or the model(s) of competitive advantage alone. The major aim of this paper is to establish a link between the principles of comparative and competitive advantage, and outline a synthesis of the two principles as a guiding force for gauging success of nations and/or firms in international trade/business.