Reallocation effects in the specific factors and Heckscher–Ohlin models under firm heterogeneity

We set up a two countries two sectors model with firm heterogeneity that nests both the Heckscher Ohlin model and the specific factor model. We use this model to study: (a) to what extent the analytical and numerical results in Bernard et al. (2007) on firm heterogeneity and factor abundance extend to the specific factor model; (b) the robustness of the numerical results in Bernard et al. (2007); (c) the determinants of the magnification of productivity differences between the comparative advantage and comparative disadvantage sector. We get the following results. (1) The magnification of productivity differences in the Heckscher–Ohlin model does not hold for trade cost reductions from all levels of trade costs. (2) The scarce factor of production does not unambiguously gain from trade liberalization in the Heckscher–Ohlin model, especially for larger differences in relative factor abundance. (1) and (2) differ from Bernard et al. (2007). (3) Also in the specific factor model both magnification and demagnification are possible and the scarce production factor can both gain and lose with trade liberalization. (4) In the general model and the nested models the magnification effect rises when the forces of comparative advantage are more pronounced.