Factor Endowment, Structural Coherence, and Economic Growth

Abstract

This paper studies the industrial structure change induced by factor endowment changes, and explores the linkage between structural coherence and economic growth. Here structural coherence is defined as the degree that a country's industrial structure optimally reflects its factor endowment fundamentals.

Using data from 28 industries across 15 countries, I found that at least for the overall capital, the shares of capital intensive industries were significantly bigger with higher initial capital endowment and faster capital accumulation. More importantly, the results show a significantly positive relationship between a country's aggregate output growth and the degree of structural coherence in all types of capital. Quantitatively, the structural coherence with respect to the overall capital explains about 25% of the growth differential among sample countries.

The results of the paper are mostly robust to alternative measure of capital intensity, to controls for other industry characteristics such as human capital and degree of value-added, and to controls for other determinants of structural change on both demand side and supply side.

Keywords: structural change, factor endowment, economic growth, structural coherence

JEL Classification: O1, O2, O5, E2, F4