Industrial Structure and Capital Flows

This paper provides a new theory of international capital ows. In a frameworkthat integrates factor-proportions-based trade and nancial capital ows, a novel forceemerges: capital tends to ow towards countries that become more specialized incapital-intensive industries. This `composition' eect competes with the standard forcewhich channels capital towards the location where it is more scarce. If the compositioneffect dominates, capital flows away from the country hit by a positive laborforce/technology shock|a ow \reversal". One implication is that rich countries' currentaccount deficits may be a consequence of their shift towards capital-intensiveindustries.[...]