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

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

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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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
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  10. 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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  12. 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.
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