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(d) Realisation of external economies of scale;

(e) An alternative to labour migration from the poor country;

(f) Increase in managerial ability and technical personnel;

(g) Transfer of technology and innovation in products; and

(h) Serving as a stimulus for additional domestic investment.

However, Sir Dougall also warned that there is need for the host country to have the right additional public expenditure as foreign investors are likely to be less interested in receiving an exemption after a profit is made than in being sure of a profit in the first instance.

Wassily Leontief tested the HO theory in 1951 and 1956 and found that the USA imports competing were about 30% more capital intensive than its exports. Since the USA was the most capital abundant nation, this result was the opposite of what the HO theory predicted and this became known as the Leontief paradox. Although subsequently the Leontief paradox was partly resolved in the 1980s, it led to the spring ball of modern theories of trade namely Linder’s thesis (Similar Preference Model or Spillover Theory), Posner’s Model (Technological Gap Model or Innovation –Imitation Model) in 1961 and the Product Cycle theory of Vernon in 1966. The HO model is inappropriate in explaining trade between countries with the same level of development while with the Spillover theory especially concerning manufactured goods, industrialised countries which have similar factor abundant can trade together. The Linder’s thesis rests on the belief that a country will export a particular commodity if it has a domestic market for the goods. In fact, domestic market is exploited first. If there are economies of scale in the domestic market, there will be a cost advantage to make export possible. Goods will be exported to countries with similar tastes and similar level of development so that trade will take place with countries of similar living standards.

The technological gap theory is typical for the industrialised countries. It states that new products are likely to emerge in the market as a result of innovation. At first production is made for the domestic market. Then firms which bring forth these products have economic rent so that they have strong monopoly position. This makes it easier to tap international market. But this product in question is imitated overseas after some time period. Therefore, there is a shift in comparative advantage. So, we can say that there is an innovation-imitation process. We talk of technological gap because there is a gap between the country which invent the product and those which imitate them.

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