Human Capital and International Capital Flows

Abstract

In the traditional Heckscher-Ohlin type of trade and growth theory, capital mobility is not integrated. Embodied in products, factor mobility takes place by the way of commodity trade. As a consequence, H.-O. theory implies factor price equalization. Therefore, there are only few proposition to combine Heckscher-Ohlin trade theory and international factor mobility. The first approach is proposed in a model, which is frequently called the Kemp-Jones model [Ruffin (1984)]. The reason for capital mobility in this kind of model is a deviation in productivity. This recardian type of argument can not only imply trade, but also international mobility of capital. A second incentive for capital mobility was brought up by Fischer/Frenkel (1972). In the Fischer/Frenkel approach installation costs of capital induce capital mobility. Generally, capital mobility was discussed more as a problem of monetary macroeconomics than as component of pure trade theory. In the subsequent paragraphs a different view of integrating capital mobility into H.-O. trade theory is suggested [see also Gries (1993)]. Four characteristics modifying standard neoclassical open economy growth theory are important: The small open economy produces with three factors of production (labor, real capital and human capital). The production process described by the foreign exchange production function [see Findlay (1973,1984)]. Real capital and human capital are accumulated over time and labor is exogenously growing. A country’s economic fundamentals are characterized by the local immobile factor endowment [characteristic endowment] namely labor and human capital. Human capital is identified as the ’peoples skills’. Human capital is ’embodied’ in the population, and therefore is an immobile factor. Making use of results well known in labor economics, human capital and real capital are poor substitutes in the production process. In a survey on human capital Hamermesh (1986) finds: ”Perhapss the most consistent finding is that non production workers (presumable skilled labor) are less easily substitutable for physical capital than are production workers (unskilled labor). Indeed, a number of the studies find that nonproduction workers and physical capital are p- complements. This supports Rosens’ (1968) and Griliches (1969) results on capital- skill complementary hypothesis”(Hamermesh 1986, p. 461). The accumulation of human capital is determined by portfolio decisions and an intertemporal optimal program. Accumulated local human capital determines the local requirements of real capital. Real capital is supplied totally elastic on world markets and employed on a ’normal’ level of utilization. Real capital will never be the limiting factor for a potential momentary rise in production. KeywordsHuman CapitalCapital MobilityHuman Capital AccumulationTrade TheoryCapital EndowmentThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.