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The Determinants of Capital Intensity in Manufacturing: The Role of Factor Market Imperfections

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  • Hasan, Rana
  • Mitra, Devashish
  • Sundaram, Asha

Abstract

We study the role of factor market imperfections in determining industry-level capital intensities. Using cross-country panel data on manufacturing industries, we find that labor market imperfections arising from labor regulation have a greater influence on capital intensity than do credit market imperfections. Less restrictive labor regulations are associated with lower capital intensity in manufacturing, especially in middle-income and developing economies and in sectors that either require more frequent labor adjustment or are more unskilled labor intensive. This suggests that stringent labor regulations can impose costs on labor use, thereby curtailing gains from trade based on factor-abundance driven comparative advantage.

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File URL: http://www.sciencedirect.com/science/article/pii/S0305750X13001332
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Article provided by Elsevier in its journal World Development.

Volume (Year): 51 (2013)
Issue (Month): C ()
Pages: 91-103

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Handle: RePEc:eee:wdevel:v:51:y:2013:i:c:p:91-103
Contact details of provider: Web page: http://www.elsevier.com/locate/worlddev

Keywords: capital intensity; factor-market imperfections; Heckscher–Ohlin model; factor abundance;

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  1. Mitra, Devashish & Ural, Beyza P., 2007. "Indian manufacturing : a slow sector in a rapidly growing economy," Policy Research Working Paper Series 4233, The World Bank.
  2. Timothy Besley & Robin Burgess, 2002. "Can Labour Regulation Hinder Economic Performance? Evidence from India," STICERD - Development Economics Papers - From 2008 this series has been superseded by Economic Organisation and Public Policy Discussion Papers 33, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  3. Alejandro Cunat & Marc J. Melitz, 2007. "Volatility, labor market flexibility, and the pattern of comparative advantage," LSE Research Online Documents on Economics 19714, London School of Economics and Political Science, LSE Library.
  4. Rana Hasan & Devashish Mitra & K.V. Ramaswamy, 2003. "Trade Reforms, Labor Regulations and Labor-Demand Elasticities: Empirical Evidence from India," NBER Working Papers 9879, National Bureau of Economic Research, Inc.
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  6. Botero, J. C. & Djankov, S. & Porta, R. L. & Lopez-de-Silanes, F. & Shleifer, Andrei, 2004. "The Regulation of Labor," Scholarly Articles 27867241, Harvard University Department of Economics.
  7. Trefler, Daniel, 1993. "International Factor Price Differences: Leontief Was Right!," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 961-87, December.
  8. Andrei A Levchenko, 2004. "Institutional Quality and International Trade," IMF Working Papers 04/231, International Monetary Fund.
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  10. Aditya Bhattacharjea, 2006. "Labour Market Regulation and Industrial Performance in India--A Critical Review of the Empirical Evidence," Working papers 141, Centre for Development Economics, Delhi School of Economics.
  11. Gupta, Poonam & Hasan, Rana & Kumar, Utsav, 2009. "Big Reforms but Small Payoffs: Explaining the Weak Record of Growth and Employment in Indian Manufacturing," MPRA Paper 13496, University Library of Munich, Germany.
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  13. Peter K. Schott, 2003. "One Size Fits All? Heckscher-Ohlin Specialization in Global Production," American Economic Review, American Economic Association, vol. 93(3), pages 686-708, June.
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Cited by:

  1. Judzik, Dario & Sala, Hector, 2015. "The determinants of capital intensity in Japan and the US," Journal of the Japanese and International Economies, Elsevier, vol. 35(C), pages 78-98.

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