Competitive Advantage

An improvement on the traditional theory of comparative advantage is the theory of competitive advantage. Unlike the Ricardian model, which was useful for understanding the simpler economies of the early period of the Industrial Revolution, this approach focuses on the social creation of innovation in a rapidly changing, knowledge-based economy. The key to competitiveness in this view is productivity growth: Over the long run, rising productivity creates wealth for everyone, if not equally. Productivity growth in turn reflects many factors, including the education and skills of the labor force, the available capital and technology, government policies and infrastructure, and the presence of scale economies.

Competitive advantage is dynamic and changes over time. The goal of national development strategies is to move into high value–added, highprofit, high-wage ...