Factor Endowments and Industrial Structure

What determines industrial structure? Do sector‐specific characteristics such as unionization, regulation, and trade policy dominate production patterns? One is inclined to believe so based on countless industry‐level studies and the many political battles that are continually fought over trade and industrial policy. In contrast, standard neoclassical trade theory suggests that industrial structure is primarily driven by relative factor supplies. This paper demonstrates that aggregate factor endowments explain much of the structure of production—independent of industry idiosyncrasies—and quantifies the extent to which shifts in industrial structure in a cross‐section of countries are driven by the broad forces of factor accumulation. These results are reached through an empirical application of the factor proportions model of production.