Risk of Expropriation and Rybczynski Theorem

Abstract

In the Heckscher-Ohlin world, Rybczynski theorem predicts that holding product prices constant, an increase in the relative supply of a factor increases the relative output of the good that uses that factor intensively so much that the output of the other goods decline. Using a sample of 16 developing countries, 28 manufacturing industries and eight years, we find evidence contradicting the predictions of Rybczynski theorem. This contradiction is examined using a modification of the Heckscher-Ohlin model to allow for international variability in corruption and risk of expropriation. Our results show that the weak enforcement of property rights indicated by the increase in the incidence of corruption and the increase in the risk of expropriation counteracts the increase in the relative output of capital-intensive goods to the output of labor-intensive goods caused by an increase in the capital stock per worker and predicted by Rybczynski theorem.