Determinants of Trade and Foreign Investment: Further Evidence

Abstract

A LTHOUGH considerable progress has ,Albeen made analytically and empirically within the last few years in better understanding the factors that determine the commodity composition of a country's international trade, there still remain many unresolved questions. There is widespread agreement, however, that a simple two-factor (capital and labor) version of the Heckscher-Ohlin theory is inadequate. Such assumptions of this traditional theory as identical production functions among countries for identical commodities, the homogeneity of labor supplies, constant returns to scale, and the international immobility of productive factors seem to be sufficiently violated in the actual world so that relative proportions of capital and labor are but one of several factors influencing the commodity pattern of trade. Nevertheless, the simple factor proportions theory has not been thoroughly tested against the trade patterns of large numbers of countries.1 Perhaps the high proportion of seemingly paradoxical results from tests made on the trade of a limited number of countries is due to the nonrepresentativeness of the sample selected. The comparatively few country tests are also insufficient to indicate clearly just what the relative importance and degree of generality is of elements other than physical capital and labor as determinants of the commodity structure of trade, e.g., research effort providing technological leadership to a country and relative supplies of human capital. Another subject on which there is inadequate knowledge concerns the determinants of the commodity pattern of direct foreign investment. Are they the same as those that determine commodity trade? Moreover, what is the relationship between trade and direct foreign investment? The purpose of this paper is to present additional empirical findings that relate to these questions in the trade and investment area. More specifically, the value of capital per worker that is embodied in exports versus import-competing production is estimated for some 35 countries using capital/labor industry coefficients and sectoral input-output coefficients based, alternatively, on United States, European Economic Community (EEC), and Japanese production data. These direct and indirect factor content ratios are then compared with a measure of the relative capital/labor endowments ratios in the countries. Utilizing U.S. measures, the relative importance of human capital, economies of scale, and research and development activities is also ascertained. The analysis of direct foreign investment is based on U.S. data and consists of relating such industry characteristics as capital/ labor ratios, skill and educational levels and the height of tariffs and transportation costs that protect a domestic industry to the ratio of direct foreign investment to total investment in an industry.

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