Stages of diversification and specialization in an Heckscher-Ohlin world, 1976-2000

Catia Batista and Jacques Potin

No 356, Economics Series Working Papers from University of Oxford, Department of Economics

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 50 developed and developing countries covering the period 1976-2000. 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, national industries are grouped in one of two HO aggregates: an aggregate of labor-intensive industries and an aggregate of capital-intensive industries. Decomposing changes in industrial concentration over time, we show that at least 30% of these changes seems to be explained by the diversification or concentration patterns at the HO-aggregate level. As the combined effect on specialization of changes in technology and relative prices seems to be small, the mechanism we identify is the textbook Rybcynski effect: poor countries accumulating capital have diversified their industrial production by producing more capital-intensive goods, while rich countries accumulating capital have made their production more concentrated by specializing in the production of capital-intensive goods.

Keywords: Economic Growth and International Trade; Heckscher-Ohlin; Multiple Cones; Diversification; Specialization; Industrial Concentration; Structural Change (search for similar items in EconPapers)
JEL-codes: F11 O40 (search for similar items in EconPapers)
Date: 2007-09-01
New Economics Papers: this item is included in nep-int
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