International specialization and the return to capital

Abstract

AbstractHow does factor accumulation affect an open economy’s pattern of international specialization and returns to capital? We provide a new integrated treatment to this question using a panel of 44 developing and developed countries over the period 1976–2000. The data confirm the Heckscher-Ohlin prediction that, with sufficient differences in country endowments, there is no factor price equalization and countries specialize in different subsets of goods. Innovatively, we obtain the returns to capital implied by this model: these are consistent with the Lucas paradox, which we explain after accounting for cross-country differences in the cost of capital goods. Our findings are also consistent with Ventura’s hypothesis that the growth of small open economies can be promoted by “beating the curse of diminishing returns” – indeed we find no decrease in the return to capital at any given capital-labor ratio despite capital accumulation by most countries within a cone of diversification.