Technology, endowments, and the factor content of bilateral trade

Abstract

We derive testable restrictions relating the factor content of bilateral trade to bilateral differences in technology and endowments. This departs from the Heckscher–Ohlin–Vanek theorem which compares the factor content of net trade with factor abundance. We test the theoretical restrictions using a unique dataset that covers 41 developed and developing countries with disparate endowments and technology. We find evidence supporting the predictions. In addition: (1) The factor content predictions perform best for country pairs with larger endowment differences, and (2) for trade between capital-abundant countries, Ricardian international technology differences matter more than Heckscher–Ohlin factor endowment differences.