Vertical Specialization Analysis Within The Framework Of The O-ring Theory

The traditional theory of Comparative Advantage is considered as only explainingthe inter-industry vertical trade that commonly exists between developed countriesand developing countries. The intra-industry horizontal trade that mainly takes placewithin developed countries is thought to be explained by the New Trade Theory. Thetheory of Comparative Advantage and the Trade Theory can be complemented eachother. The paper analyses vertical specialization on world trade within the framework ofthe O-ring theory. Within such a framework it is useless for substituting quantity forquality or for gaining market shares by undercutting established suppliers only on cost.Quality requirements will increase as lead firms in the supply chain invest intechnology that reduces inventory and speeds up the production process. So thepotential supply countries will have an incentive to upgrade quality or make theefficient infrastructure, logistics and customs procedures in place. The paper first reviews the international division theories, and shows theappearance and development of vertical specialization on world trade. Then the paperpresents and explains the O-ring theory, and also analyzes the vertical specializationwithin the framework of the O-ring theory. A comparative analysis of the electronicstrade between China and Mexico will follow this part. This empirical research willsupports the point of this paper.