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International specialization and the return to capital

  • Cátia Batista EMAIL logo and Jacques Potin

Abstract

How 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.

JEL Codes: F11; F21; O40

Corresponding author: Cátia Batista, Nova School of Business and Economics, Faculdade de Economia, Universidade Nova de Lisboa, Campus de Campolide, 1099-032 Lisboa, Portugal, e-mail:

Acknowledgments

We would like to thank the editor, Tiago Cavalcanti, an anonymous referee, as well as Gino Cateau, Marcos Chamon, Nicolas Coeurdacier, Julian Di Giovanni, Sebnem Kalemli-Ozcan, Laurence Lescourret, Beata Javorcik, Patricia Langohr, Peter Neary, Radu Vranceanu, Adrian Wood and participants at a number of seminars and conferences for their comments on this and earlier versions. Excellent research assistance was provided by Christoph Lakner. The authors gratefully acknowledge financial support from the George Webb Medley Fund at the University of Oxford, the Arts and Social Sciences Benefactions Fund at Trinity College Dublin, and Nova Forum at Nova University of Lisbon.

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Published Online: 2015-1-23
Published in Print: 2015-7-1

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