Technology, Factor Supplies and International Specialization: Estimating the Neoclassical Model

Abstract

The standard neoclassical model of trade theory predicts that international specialization will be jointly determined by cross-country differences in relative factor endowments and relative technology levels. This paper uses duality theory combined with a flexible functional form to specify an empirical model of specialization consistent with the neoclassical explanation. According to the empirical model, a sector's share in GDP depends on both relative factor supplies and relative technology differences, and the estimated parameters of the model have a close and clear connection to theoretical parameters. The model is estimated for manufacturing sectors using a 20 year, 10 country panel of data on the OECD countries. Hicks-neutral technology differences are measured using an application of the theory of total factor productivity comparisons, and factor supplies are measured directly. The estimated model performs well in explaining variation in production across countries and over time, and the estimated parameters are generally in line with theory and previous empirical work on the factor proportions model. Relative technology levels are found to be an important determinant of specialization