Introduction Krugman in 1994 stated in his paper that it was a global economy time. In order to generate more jobs for the future and keep competition capability in a tougher world market, it was essential to push the economy into high-end and high-value sectors to maintain people’ standard of living. The only way to increase the competition was to create a new partnership between government and business. The above statement from Krugman(1994) also mentioned by the World Economic Forum in 2008, in its Competitiveness Report which ranks countries in terms of their international competitiveness. But the report was considered meaningless by Krugman(1994) when it applied to national economies. Krugman(1991) claimed that nations were not firms, …show more content…
Demand as a factor to explain trade was not new. Linder (1961) first introduced demand to explain intra-industry trade, but his theory only focused on the similarities of demand among the nations. However, Porter’s theory mainly focused on the demand differences. According to Porter (1990), home demand shaped how firms perceived, interpreted and responded to buyers’ needs. This forced home country firms to continually innovate and upgrade their competitive positions to meet higher standards in terms of product quality, features and service demands. Porter (1990a, 1998a) regarded the essential demand was home demand that anticipated and led international demand; industry segmented with a significant share of home demand. However, different demand conditions in countries, leading to different demand structures, can determine location economies of increasing returns, as explained by the new trade theories. Location economies of increasing returns that kept an industry in a specific location, due to a specific set of demand conditions, will be difficult to be competed away by industries in another country (Krugman & Obstfeld 2003). In such cases, comparative advantage was determined by demand conditions rather than differences in factor …show more content…
Both the traditional and new theories of trade showed that countries engaged in international activities because of the advantages that resulted from such activities. The gains from trade came through specialization, which could be either comparative advantage or economic scale both internal and external. Comparative advantage arose as a result of differences of competitive advantages among nations, and the differences of trade among nations that owned similar industries were explained by the economic scale theory. It is evident from the literature review that free trade, although not always optimal and fair, was better than any sophisticated protectionist strategic trade policy (A.J.Smit,