Working Paper No. 06-08

Development-Related Biases in Factor Productivities and the HOV Model of Trade
Keith E Maskus and Shuichiro Nishioka
October, 2006

ABSTRACT

Past empirical failures of the basic Heckscher-Ohlin-Vanek (HOV) model related to its restrictive assumptions, particularly identical international technologies and factor price equalization. Trefler (1993) resuscitated HOV by introducing a simple Hicks-neutral (HN) factor-productivity adjustment, an approach that was heavily criticized. In this paper, we reexamine the productivity question by estimating factor productivities from the individual technology data of multiple countries. Using a dataset of 15 OECD countries, we find positive evidence for Trefler’s idea, but with factor augmentation. Further, we find that the ratios of factor productivities are strongly correlated with corresponding factor endowments. This systematic bias implies that the ability of HOV to explain North-South factor trade depends both
on relative factor abundance and productivity gaps. We thus extend Debaere’s (2003) conclusion that North-South trade is determined by HN-adjusted endowment differences.

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