A Story of Trade-induced Industrialization

We offer a simple variant of the standard Heckscher-Ohlin Model that explains how a developing country, by opening up to trade with a large capital-abundant economy, can be induced to shift resources into more capital-intensive production than that which it was producing in autarky. As a result, it experiences a rise in its return to capital and, if capital is internationally mobile, both an increase in its capital stock and an increase in trade. These results arise in a model in which both a traditional and a modern sector can produce final goods that are perfect substitutes. The modern sector uses intermediate inputs that differ in their relative capital intensities, while being both more capital intensive than the traditional sector. The results of this model accord well with the experience of the Asian Tiger economies during the early decades of their export-oriented industrialization.