Heckscher-Ohlin-Vanek Theory and Empirical Study

In this paper, an empirical evaluation is performed to test Heckscher-Ohlin theory regarding the trade pattern of Korea with respect to the U.S. and Japan. Using a factor content model (Heckscher-Ohlin-Vanek), we look at whether factor abundance determine the sign of net exports. The factor content model, developed by Vanek and Travis (1964) was most recently extended to empirical testing by Leamer and Bowen (1987). The model interprets the Heckscher-Ohlin hypothesis as a relation between three variables (trade, endowments, inputs). Using the U.S. and Korea`s matrix of total input requirements for 1978, the amount of each of twelve factors embodied in the net exports of Korea, Japan and the U.S. are computed. In testing the H-O theory in terms of Korean traingular trade on the basis of factor content, we attempt to determine whether the relatively labor-rich Korea exports labor to the U.S. and Japan while importing capital from them. If the H-O- V theorem holds for the Korean trade pattern, the existing trade surplus with the U.S. and deficit with Japan may be explained by the fact that Japan is the more relatively capital rich country among the three. However, it is shown that the H-O-V theorem does not predict the exact trade patterns that exist between Korea, Japan and the U.S. Besides, we find that the H-O-V theory has a weak point in that it ignores differences in technological capabilities.