Development‐related biases in factor productivities and the HOV model of trade

Abstract

Abstract Past empirical failures of the basic Heckscher‐Ohlin‐Vanek (HOV) model related to the inability of data to meet its restrictive assumptions. Trefler (1993) tried to resuscitate HOV by introducing a simple Hicks‐neutral (HN) factor‐productivity adjustment. In this paper, we re‐examine this question by estimating factor‐specific productivities from the individual technology data of multiple developed and developing countries. We find evidence of factor‐augmenting technological differences. Further, the ratios of factor productivities are strongly correlated with corresponding factor endowments. This systematic bias implies that the ability of HOV to explain North‐South factor trade depends on both relative factor abundance and factor‐augmenting productivity gaps.