Factor intensity reversals redux: Feenstra is right!

Abstract

AbstractTwo‐ or more‐factor general equilibrium models commonly assume no factor intensity reversals (FIRs): a good that is relatively capital intensive compared with other goods within a country/region is also relatively capital intensive within another country/region. This assumption is so important that its breakdown results in the collapse of several well‐known theorems, such as the Heckscher–Ohlin theorem and the Stolper–Samuelson theorem. Seeing a recent observation, however, Feenstra (2015, Advanced international trade: Theory and evidence (2nd ed.), Princeton University Press) argues that FIRs are quite realistic. Our nonparametric test finds that recent regional‐level data support his view. At the two‐digit industry level, the degree of FIRs among regions is higher than those found in previous studies, which is accompanied by wide differences in relative factor prices among regions. The degree has also increased over the last two decades. FIRs are even stronger at the disaggregated four‐digit industry level and, though not many, exist at the two‐aggregated‐industry level as well. At all the three levels, FIRs do not disappear even when we take into account other factors such as human capital and land. Thus, considering a model without restrictions on FIRs might be a possible direction of research.