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Reaping the Gains: Specialization and Capital Flows

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  • Schwab, Jakob
  • Ortseifer, Christina

Abstract

This paper gives a new answer to the old question of whether international trade and capital flows are substitutes or complements. In contrast to conventional intuition, we show that when Heckscher-Ohlin trade takes place in high-skill and low-skill intensive goods, this does create incentives for capital flows. Technically, we incorporate capital as a composite factor in a tractable 3-factor neoclassical trade model. It shows that countries for whom trade induces greater trade specialization observe larger capital inflows. By using data on revealed comparative advantage while controlling for common factors, we provide emprical evidence for our results.

Suggested Citation

  • Schwab, Jakob & Ortseifer, Christina, 2015. "Reaping the Gains: Specialization and Capital Flows," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113194, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc15:113194
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    Cited by:

    1. Philipp Harms & Jakob Schwab, 2019. "Like it or not? How the economic and institutional environment shapes individual attitudes towards multinational enterprises," The World Economy, Wiley Blackwell, vol. 42(3), pages 636-679, March.

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    More about this item

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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