Working Paper No. 05-06

An Explanation of OECD Trade with Knowledge Capital and the HOV Model
Shuichiro Nishioka
October 2005, revised October 2006


This study examines the international factor trade of the developed (OECD) countries within the Heckscher-Ohlin-Vanek (HOV) model. Previous empirical work largely has not supported the HOV predictions for OECD trade, perhaps because of the similarity in factor abundance among those countries. In this paper a previously unexplored factor -- knowledge capital (measured by cumulative R&D stock) -- is introduced into the HOV framework. Knowledge capital likely plays an important role in determining comparative advantage among OECD countries because they specialize in high-tech products and also show dissimilarity in knowledge abundance. By using a new dataset for fifteen OECD countries, I find strong support for the strict HOV model with the addition of knowledge capital. Moreover, the introduction of knowledge spillovers further improves performance of the HOV model.

JEL classification: F11: Neoclassical Model of Trade, O33: Technological Change; Choices and Consequences; Diffusion Processes
Keywords: Heckscher–Ohlin; Trade, International Transfer of Technology