Heckscher-Ohlin Model : A Theoretical Examination on Capital and Labor Movement in 2-Country Case --The United States and Vietnam

Abstract

International outsourcing in the past few decades has emerged as a common practice among developed countries that outsource production to third-world countries whose labor cost is just a fraction of what they pay at home. Firms often choose labor-intensive industries when utilizing this service abroad. In Vietnam, many American textile firms allocate more capital to the Vietnamese labor force for a cheaper cost. This paper seeks to analyze this instance with the use of the Heckscher-Ohlin Model in an attempt to give recommendations to the Vietnamese economy regarding this popular phenomenon. This paper first gives an overview of the Heckscher-Ohlin Model together with international outsourcing along with a more in-depth analysis of the practice of outsourcing in the United States and Vietnam. By analyzing the capital and labor movement between two countries in the textile industry, this paper hopes to shed light on the practice that is long believed to be beneficial for the economy. The conclusion of this paper recommends that even though providing outsourcing services to developed countries might have promising advantages such as an increase in GDP or employment rate, overuse of this practice will eventually result in consequences that could potentially be detrimental to the textile industry of Vietnam in specific, and the entire country’s economy in general.