Factor-Biased Technical Change and Specialization Patterns

Abstract

We analyze the medium- and long-run effects caused by an inflow of
capital into a labor-abundant country. For that purpose, we incorporate
directed technical change into a Heckscher-Ohlin model with a continuum
of goods. This provides a comprehensive theory explaining the dynamics of
comparative advantage based on differences in effective factor endowments, i.e.
factor endowments adjusted by differences in technological levels. Our model
constitutes an appropriate framework for understanding, e.g., the empirically
observed changes in industrial structures of Central and Eastern European
countries. Furthermore, we provide a theoretical foundation for the empirical
Prospective Comparative Advantage index with new insights into the future
dynamics of comparative advantage. Eventually, we show the importance of
research spillovers and state dependence on the process of convergence.