Factor Abundance and Export Competitiveness: Hecksher-Ohlin (H-O) Theorem for Philippines and Japan Trade

Abstract

This paper empirically examined the validity of Hecksher-Ohlin theorem in the context of the Philippine-Japan inter-industry trade. Specifically, this study tried to validate whether Japan and the Philippines are primarily exporting their relatively abundant factor and importing their scarce inputs as predicted by the H-O theorem. The question of whether factor abundance affects specialization of export trade was also addressed in this study. This study employed the Leontief’s test for H-O theorem with the addition of multiple regression time-series analysis for further validation of the test. Based on the data collected, with actual counts of the labor force in total and disaggregated, it is found that Japan relatively has an abundance of labor than the Philippines. Arguably, using the measurement of factor abundance established by Leontief and other researchers (share of supply of effective factor/share of world GDP), the result show that Japan is scarce in labor, which the Philippines is abundant. This result validates the assumption that the Philippines, as a labor abundant country relative to Japan, can export labor intensive products. In contrast, because Japan is found in this study to be a capital abundant country relative to Philippines, can export capital intensive products. Trading of these two countries using their abundant factor endowment likely provides competitive price in the international market hence could lead to export competitiveness. Furthermore, results from the Vector Error Correction Model (VECM) suggest that there is a long-run causality running from the Philippines’ labor supply and capital supply to its capacity to export merchandise products to Japan, hence enhancing efficiency on the utilization of these factor endowments could significantly improve export performance of the country that will ultimately achieve continuous increase in economic growth for the Philippines.