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

Working paper

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.

Authors: Batista, C; Potin, J

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Publication date: 2007-09-01
• Paper number: 356
• Keywords: industrial concentration; specialization; structural change; multiple cones; Heckscher-Ohlin; diversification; economic growth and international trade