Factor Endowment Theory: Saudi Arabia And South Korea as an example.

Factor Endowment Theory: Saudi Arabia And South Korea as an example.

The country that we are going to choose South Korea. The reason why we are choosing it because it is one of the largest trading partners with Saudi Araba. South Korea is the fifth trading partner with export from the Saudi side of 26 billion dollars, and imports from South Korea are more than 4.3 billion dollars (Xuequan, 2019). Saudi exports oil, chemical, deferent variety of plastic products, and copper. On the other hand, Korea exports cars, heavy trucks, machines, iron, and steel (Xuequan, 2019).

Moreover, Korea has a considerable investment in Saudi with more than 117 projects that vary from manufacturers, construction of infrastructures, and the electricity and gas industry (Xuequan, 2019). Thus, both countries have a comparative advantage with is being impacted by the resource of endowments. Both counties need each other in order to make sure that they have a stable and robust economy.

we need to know first what resource endowments and comparative advantage mean. After that, with some analyses, we will know if resource endowments have an impact on the comparative advantage or not. Resource endowment or factor of resources endowment means how many and how much a country has a resource on its hand to be used for manufacturing purposes such as land, money, and labor. Usually, a country with a large endowment is wealthier than a country with fewer endowments (How Do Factor Endowments Impact a Country's Comparative Advantage?, 2020). Comparative advantage means that the ability of an economy to make services and goods at lower opportunity cost than other countries which it treaded with. Since we know this information, we can determine the impact of resource endowments on comparative advantage for Saudi Arabia and South Korea.

First, Saudi Arabia, it is known information that Saudi is a very reach country when it comes to oil, gas, and some minerals way more South Korea. This results to have a comparative advantage on that field over South Korea when it comes to extracting oil and other materials because it is specialized in it, and it is very cheap to extract at around 3$ per barrel (Cost of Oil Production by Country, 2020). In addition to that, Saudi is one of the counties that has a very low risk of investing in the oil field because of the huge endowment, and that will automatically affect its position when it comes to comparative advantage (SARBU, 2011). South Korea has no natural recourse of oil or even a proven reserve of it. It imports 98 % of oil needs manly from Saudi and some other oil producer counties (South Korea 2017 primary energy data in quadrillion Btu: Analysis - Energy Sector Highlights, 2018). Lastly, because of the endowment that Saudi has, it affects the characteristics and the pattern of its comparative advantage on oil. Robert E. Loony suggested that Saudi should primarily focus on and promote any business that has a relation to oil (Looney, 1989).

Second, South Korea, if anyone goes to any places on earth, he/she will see a Korean product all over the places like home appliances, cars, electronics, and cellophane. Even if people did not see it as a finished product, the product they are using might have Koran components in non-Korean products such as cellophane like the iPhone has parts made in Korea (Kang, 2016). Korea has no natural resources and very poor endowment on it (the world factbook, 2020). This is one of the reasons why it relies heavily on Saudi oil. Its main factor of endowments -when the country was building itself around the 60s- is labor (south korea, n.d.). The economic strategy that it has is to encourage its economic evolution via labor-intensive manufactured exports in a way that helps the country to develop its comparative advantage (south korea, n.d.). After the country boult itself and have a strong background of technology, now it has a new comparative advantage in 12 major products like liquid crystal displays, batteries, electric circuits, autos and auto parts, organic chemicals, steel, and mobile devices, and rubber tires (Suk-yee, 2015). From that, we can see how one factor-endowment created 12 comparative advantage. That happens only in a country that knows how to use its endowment smartly and rationally. 

the U.S.-Chinese trade pattern and prove by using the trading data that factor-endowment theory is not valid in their case (International Economics). So, when we apply the same study in Saudi Arabia and South Korea, we will arrive at the same result. Saudi supply to Korea oil, gas, and other products in its raw form, and did not supply it with any technology or labor. On the other hand, South Korea export to Saudi technology, skilled labor, and innovations. As we mentioned in the introduction, Korea has a considerable investment in Saudi with more than 117 projects that vary from manufacturers, construction of infrastructures, and the electricity and gas industry (Xuequan, 2019). Even in the primary Saudi industry, which is energy South Korea is helping. We are not saying that factor-endowment theory a lousy way to predict the trade patterns, but it is not the best way. Julien Gourdon conducted research that shows Factor-endowment theory (Heckscher-Ohlin theory) provide mildly encouraging empirical results, and the results show that it performs poorly (Gourdon, 2011). Moreover, empirical studies have often exposed a weak relation among factor endowment and trade flows, both between regions and between countries (Gourdon, 2011).

Many trade theories could be applied in the Saudi-South Korea case. However, we cannot go over all of them. We can apply the Global Strategic Rivalry Theory. We chose this because both countries have multinational companies that work very hard to get a comparative advantage over other companies from other nations that work in the same industry. Let us take Aramco as an example from the Saudi said. There are many oil companies around the world from OPEC and Non-OPEC counties. Aramco can put a barrier that makes other oil companies do not enter or find it very hard or unprofitable to enter the Korean market. For example, it can give a better price than the global market. However, let not forget that political part of this (Calabrese, 2019) and the role of WTO (World Trade Organization), which may make it difficult but not impossible to implement. Now, let us take the Korean side. Since Korea has more than 117 projects in Saudi Arabia (Xuequan, 2019) it has a competitive advantage a country in Saudi Arabia because if the Saudis do not trust the Korean companies, there is no way they will give them any project. So, Korean companies can use trust as their comparative advantage (Dau, Syed Shah, & Roshayati bt Abdul, 2017).

Saudi 2030 vision is one of the trade initiatives, and since oil, one of the factor endowments, it provides Saudi with a considerable amount of money. With this money, Saudi has much better poison to meet its 2030 vision. For example, Saudi Vision 2030, offer economic and social transformation, has been softly gathering the attention of South Kore companies (Kim, 2018) . South Korea aggressively searches for opportunities in Saudi Vision 2030 (Kim, 2018). Not only does the vision promise massive business opportunities, but Korea also has faith that its government and companies own the right experience and expertise needed to meet part of Saudi 2030 Vision objectives (Kim, 2018). Both counties use their endowment very well – Saudi the natural resources and Korea skilled labor and technology – which they use to complete each other. So, because of that, both have an extraordinary level of economic complementarity, and they have almost no conflicts of interest in when it comes to politics (Kim, 2018). Which in the end, will lead to making Saudi meet its vision and Korea have much more business and a stronger economy.

References

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