Testing the Heckscher-Ohlin Theory on 2016 Factor Endowments and Trade Diversification

Elizabeth Chinenye Ejereonye

Cohort A

ABSTRACT

The basic notion of the Hecksher Ohlin model is that countries should focus production

on the good that uses the factor with which it is heavily endowed to gain a comparative

advantage. Given this specialization’s reflections on international trade, it is expected that the

export basket from a labor-abundant country to a capital-abundant country would be more

labor-intensive than a basket of imports from the capital-abundant country. However, it is not

usually the case. Through an analysis of five countries (Croatia, Finland, and Sweden, Cabo

Verde, and Cote d’Ivoire) and their factor endowments, the Hecksher-Ohlin hypothesis is

investigated in this paper.

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Introduction

Countries’ economies usually have different characteristics; for instance, there is a

consensus that developing countries like Cote d’Ivoire have less physical capital and more

labor and human capital than their developed counterparts, such as Sweden (Campbell &

Ahmed, 2012). While this is not always the case, it is expected that the nature of the country’s

factor endowment largely determines its trade components. For instance, agriculture accounts

for a substantial share of the labor market for most developing countries; hence their trade

components in exports are expected to be more agricultural and labor-based. The Hecksher-

Ohlin theorem expands on these by predicting trade and production patterns based on factor

endowments. Due to a need for aggregate data sources on individual country endowment as

well as trade components, data to be examined will be from the World Bank’s Development

Indicators and the Observatory of Economic Complexity (OEC), an online data visualization

and distribution platform focused on the geography and dynamics of economic activities.

The factor endowment theory holds that countries will most likely be abundant in

different resources since the ratios of one resource to another will differ. In line with the

Hecksher-Ohlin theory, a country has a comparative advantage in using the heavily endowed

factor. However, it is essential to remember that while a country may be heavily endowed with

a particular resource, it proportionally may have more of that resource than another country.

The Hecksher-Ohline model examines the differences in factor endowments as a reason for

trade captured by the proposition that each country exports the commodity which uses the

country’s abundant factor more intensively (Suranovic, 2010). Hence, if a country has a

comparative advantage in a good that uses the factor with which it is heavily endowed, it should

focus its production on that good.

While the factor endowment theory does a great job explaining the underlying concepts

of comparative advantage, it may not be consistent for all situations. Using the 2016 factor
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endowments for selected countries, this paper will explore the question, “does a country’s

factor endowments determine its trade component?.”

Methodology

This research uses data collected from the World Bank Development Indicators and

further analyzed to obtain figures, summary statistics, and computations using Microsoft Excel

and 2016 as the base year. Figure 2 shows the shares of three factors of production; physical

capital, human capital, the labor force – and world GDP in 2016 for five countries in Europe

(Croatia, Finland, and Sweden), and Africa (Cabo Verde and Cote d’Ivoire), and the rest of the

world. Data were obtained under specific parameters such as GDP in constant US dollars,

human capital as a variable of net secondary school enrollment, total labor force as the measure

of labor, and gross capital formation as the measure in constant US dollars for physical capital.

Using aggregate data from the world, this paper compares a country’s share of a factor with its

share of world GDP to determine whether it is abundant in a particular factor or not. According

to Feenstra and Taylor (2014), “if a country’s share of a factor exceeds its share of world GDP,

then we can conclude that the country is abundant in that factor and if it is less, we conclude

that the country is scarce in that factor. The percentage outputs in figure 1 were derived for the

year 2016 as:

The share of a factor for a country = (The amount the factor in that country / the

amount of the factor in the world) x 100.

The share of the world’s GDP for a country = (The amount of GDP in that country /

the amount of GDP in the world) x 100

Results
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For this analysis, calculations for factor abundance in 2016 for the individual

countries are shown. As shown in the bars in Figure 2, for instance, Sweden had 0.68% of the

world GDP, while Cote d’Ivoire had 0.06%. A detailed analysis of the result is shown below:

Capital Abundance: In 2016, 0.68% of the world’s physical capital was located in Sweden,

with 0.29% situated in Finland, 0.06% in Cote d’Ivoire, 0.06% in Croatia, and 0.0031% in

Cabo Verde. Comparing these numbers with each country’s percentage of world GDP, it is

observed that Sweden had 0.68% of the world GDP, Finland had 0.32%, Cote d’Ivoire had

0.06%, Croatia had 0.07%, and Cabo Verde had 0.0022%. Because Sweden had 0.68% of the

world’s physical capital and 0.68% of the world GDP, we can conclude that Sweden was

neither scarce nor abundant in physical capital in 2016. However, with 0.29% and 0.06% of

the world’s capital, Finland and Croatia were scarce in physical capital compared with their

respective percentages of world GDP of 0.32% and 0.07%, respectively. Cote d’Ivoire, with

0.06% of the world’s physical capital and 0.06% of world GDP, was neither abundant nor

scarce in physical capital, just like Sweden. On the other hand, Cabo Verde had a 0.0031% of

the world’s physical capital, which was greater than its 0.0022% share of the world’s GDP and

hence, was abundant in physical capital. The countries in the rest of the world had their shares

of physical capital greater than their shares of GDP, making them abundant in physical capital.

Human capital and labor abundance: We use a similar comparison based on Figure 2 to

determine whether each country is abundant in labor and human capital illustrated by net

secondary enrollment. Sweden is abundant in human capital (ratio of individuals enrolled in

secondary education) but scarce in labor, as shown by its 1.11% and 0.16% of the world’s total

for both factors compared with its corresponding share of 0.68% of world GDP. In the same

manner, Finland is abundant in human capital (individuals with secondary school enrollment)

but scarce in labor, as shown by its 1.07% and 0.08% of the world’s total for both factors

compared with its corresponding share of 0.0.32% of world GDP. Croatia follows the same
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pattern with 1.03% and 0.05% of the world’s total for human capital and labor, respectively,

compared with 0.07% of its GDP. Cote d’Ivoire is abundant in both human capital and labor,

as shown by its 0.39% and 0.23% of the world total, compared to its 0.06% of the total world

GDP. This is the same for Cabo Verde, whose 0.8017% and 0.0067% of the world’s total is

greater than the world’s GDP of 0.0022%, making it abundant in both factors of production.

Based on the above results, further attempts can be made to explore the nature of the

exports and imports for the countries to determine if they are in line with the Heckscher-Ohlin

model or not. According to the model, labor-abundant countries, including Cote d’Ivoire and

Cabo Verde, two developing African countries, should export labor-intensive goods.

Consequently, capital-abundant countries like Finland and Croatia should export capital-

intensive goods. According to Table 1, Sweden, Croatia, and Finland export more capital-

intensive goods like cars, broadcasting equipment, and vehicle parts than they import from

their trading partners. Therefore, these countries can be said to be more capital than labor-

intensive. However, it can also be observed that cars appear on the list of exports for both

Sweden and Finland. Albeit been labor scarce and neither abundant nor scarce in capital,

Sweden, proves more efficient than Finland, which likely stems from its ability to use less labor

to produce a unit of output. Its ability to export nearly twice the number of cars it imports lends

credence to the intra-industry trade argument while also agreeing to an extent with the

Hecksher-Ohlin model since both countries are exporting.

On the other hand, Cabo Verde and Cote d’Ivoire’s main exports fall within the

“mining, fishing, and agriculture” class. At the same time, their major imports include capital-

intensive goods like cars and delivery trucks. This is in line with the Hecksher-Ohlin model

and the factor endowment theory. Both countries have labor and human capital abundance.

Hence, they export more labor-intensive goods and import more capital-intensive goods.

However, Cabo Verde, which was capital intensive based on its factor endowment, does not
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seem to export more capital intensive goods, probably because it is inefficient, hence using

more labor to produce and output goods.

Conclusion

Some conclusions can be drawn from the quantitative and quantitive findings above.

Firstly, we find that while it is expected that developed economies like Finland are more

capital-abundant, the factor endowment theory proves otherwise because both Croatia and

Finland were scarce in physical capital and labor. Even though this is the case, the trade

components show that both companies export more capital-intensive goods. It can be deduced

that while the factor endowment theory and Hecksher-Ohlin models can predict trade patterns,

other factors beyond factor endowments also motivate international trade. However, in our

analysis, the Heckscher-Ohlin model accurately predicts the trade patterns for developing

countries, Cote d’Ivoire and Cabo Verde. In these countries, both human capital and labor are

abundant, most likely due to the growing population of young people and working-age

individuals in Africa. Since they are both capital scarce, their export baskets consist of labor-

intensive goods such as agricultural products. So while the factor endowment theory can

explain underlying ideas of comparative advantage and trade, it does so to an extent.

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References

Campbell, D., & Ahmed, I. (2012). The labor market in developing countries.

https://conference.iza.org/conference_files/worldb2012/campbell_d2780.pdf. Retrieved

November 19, 2021, from

https://conference.iza.org/conference_files/worldb2012/campbell_d2780.pdf.

DataBank. (2015). World development indicators. Retrieved November 19, 2021, from

https://databank.worldbank.org/source/world-development-indicators.

Feenstra, R. & Taylor, A. (2014). International Economics (3rd Edition). New York: Worth

Publishers, Macmillan Learning.

OEC. (2019). About the site. Retrieved November 19, 2021, from

https://oec.world/en/resources/about.

Suranovic, S. M. (2010). International Economics: Theory and policy. Flat World Knowledge.

Retrieved November 19, 2021.

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Appendix

Figure 1: Summary Statistics

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100% 0.16%
0.08%
0.68% 0.23% 0.68%
0.05%
0.0067%
1.11%

0.29% 0.32%
99% 0.06%
0.06% 0.06%
0.0031% 0.07%
0.0022%

1.07%

98%

0.39%

97% 1.03%

99.47%

96% 0.8017% 98.91% 98.87%

95%

95.60%

94%

93%
School enrollment, Gross capital Labor force, total GDP (constant
secondary (% net) formation 2015 US$)
(constant 2015
US$)
Rest of the world Cabo Verde Croatia Cote d'ivoire Finland Sweden

Figure 2: Country factor endowments 2016


Countries Top Imports
Sweden • Cars ($8.75B)
• Crude Petroleum ($6.93B)
• Refined
Petroleum ($6.32B)
• Vehicle Parts ($5.77B),
Broadcasting
Equipment ($4.87B)
Importing mostly
from Germany, Netherlands, Den
mark, Norway, and China.
Finland • Crude Petroleum
• Cars ($3.34B)
• Refined
Petroleum ($2.95B)
• Vehicle Parts ($1.69B)
Broadcasting
Equipment ($1.47B)
Importing mostly
from Germany, Sweden, Russia,
China, and the Netherlands.
Croatia • Crude Petroleum ($1.63B)
• Cars ($1.47B)
• Refined
Petroleum ($1.4B)
• Packaged
Medicaments ($869M)
Electricity ($784M)
Importing mostly
from Italy, Germany, Slovenia, H
ungary, and Austria.
Cape Verde Refined Petroleum ($116M)
Delivery Trucks ($37.7M)
Coal Tar Oil ($30.7M)
Cars ($24.9M)
Rice ($19.8M)
Importing mainly
from Portugal, Netherlands, Spain to Spain, Portugal, Italy, the United States,
China, and Belgium.
9
Top exports
• Cars ($11.8B)
• Packaged Medicaments ($8.04B)
• Refined Petroleum ($7.56B)
• Vehicle Parts ($5.22B)
• Broadcasting Equipment ($3.89B)
Exporting mostly to Germany, Norway, the
United States, Denmark, and Finland.
• Refined Petroleum ($5.98B)
• Kaolin Coated Paper ($4.65B)
• Cars ($4.16B)
• Large Flat-Rolled Stainless
Steel ($2.53B)
• Sulfate Chemical
Woodpulp ($2.5B)
Exporting mostly
to Germany, Sweden, United
States, Netherlands, and China.
• Refined Petroleum ($1.1B)
• Packaged Medicaments ($695M)
• Cars ($430M)
• Blood, antisera, vaccines, toxins,
and cultures ($430M)
• Sawn Wood ($429M),
Exporting mainly
to Italy, Germany, Slovenia, Bosnia and
Herzegovina, and Austria.
Processed Fish ($40.6M)
Non-fillet Frozen Fish ($22.6M)
Molluscs ($4.2M)
Footwear Parts ($3.34M)
Non-Knit Men’s Suits ($3M)
Exporting mainly
and India.
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Cote d’Ivoire Crude Petroleum ($1.47B) Cocoa Beans ($3.84B)

Rice ($619M) Gold ($1.09B)
Non-fillet Frozen Fish ($489M) Rubber ($1.08B)
Refined Petroleum ($321M), Refined Petroleum ($1.02B)
Packaged Medicaments ($273M), Crude Petroleum ($941M)

Importing mainly Exporting mainly [to the Netherlands,

from China, Nigeria, France, Indi United States, France, Spain, and Malaysia.
a, and United States.

Table 1: Breakdown of top imports and exports of selected countries

Source: Observatory of Economic Complexity (OEC) dashboard