Stages of Diversification and Capital Accumulation in an Heckscher-Ohlin World, 1975-1995

Abstract

Recent research has documented a U-shaped industrial concentration curve over an economy's development path. How far can neoclassical trade theory take us in explaining this pattern? Building on Schott (2003), we estimate the production side of the Heckscher-Ohlin (HO) model with industry data on 51 developed and developing countries covering the period 1975-1995. We allow for multiple cones of specialization, and give special attention to intra-industry factor heterogeneity and to the potentially indeterminate nature of production. For each year, goods are grouped in one of two HO aggregates: an aggregate of labor-intensive goods, and an aggregate of capital-intensive goods. Decomposing changes in industrial concentration over time, we show that at least a third of these changes is explained by the diversification or concentration patterns at the HO-aggregate level. As the relative price of the two aggregates is fairly stable over time, the mechanism is the one of the textbook Rybczynski effect: poor countries accumulating capital have diversified their industrial production by producing more of the capital-intensive goods, while rich countries accumulating capital have made their production more concentrated by specializing in the production of the capital-intensive goods.