FACTOR ENDOWMENT, INNOVATION AND INTERNATIONAL TRADE THEORY

Abstract

Comparative advantage theory, as specified in the Heckscher-Ohlin model, holds that nations export those commodities which intensively embody their relatively abundant factors of production. Factor endowment dictates world trade patterns in the general equilibrium models of international trade. The dynamic models of international trade, such as the product life cycle model, emphasize the role of innovation in determining trade patterns. Factor endowment also plays a role in these models. In particular, a wide body of literature ties innovative activity to relative factor cost levels. If innovators are responsive to relative factor costs, innovative activity may be directed towards those sectors with heaviest usage of the most expensive factors of production in an economy. If such innovation results in exports, trade patterns emerge which directly conflict with Heckscher-Ohlin expectations. The results of this study suggest that innovative activity tends to be concentrated in industries which intensively use a nation's relatively expensive factors of production. This finding holds an alternative explanation for the Leontief paradox, and suggests a wider role for factor endowment in international trade theory.