Focusing on Industry Factor Intensity Testing of Heckscher-Ohlin Theorem with Chinese Industry Data

Abstract

This paper presents a drastically different approach to testing the Heckscher-Ohlin Theorem (HO Theorem) of factor endowment theory by explicitly recognizing the underlying assumptions of the theory and designing a testing strategy that is capable of controlling most of the influencing forces implied by the assumptions. The testing strategy abandoned the methods of estimating and comparing product factor contents of imports and exports, or factor contents of net exports base on the input-output tables that to date has been default approaches in testing the HO Theorem. Instead, attention is focused on the industry factor intensity and its relationship with the export capability of the industry based on our restatement of the HO Theorem. Utilizing 1989-2008 Chinese industry data provided by the National Bureau of Statistics of China (NBSC) and US import data by the United States International Trade Commission (USITC), the authors constructed a data set consists of 30 industry groups for the 1989-1992 and 32 for the 1993-2008 periods that covers more than 80% of total US commodity imports from China, with proxies for industry factor intensity, industry competition intensity, average firm scale, and industry export capability. In testing the HO Theorem, both simple and multiple regressions are performed for each and every individual year, and the results invariably lend strong support for the factor endowment theory.

Keywords: Factor Endowment Theory, Heckscher-Ohlin Theorem, Labor-Capital Ratio, Industry Export Capability, China

JEL Classification: C12, F1, F11, F14