DP3755 Factor Endowments and Production in European Regions

Author(s): Stephen J. Redding, Mercedes Vera-Martin
Publication Date: February 2003
Keyword(s): european integration, factor endowments, heckscher-ohlin, neoclassical model, specialization
JEL(s): F11, F14, R13
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3755

This Paper analyses patterns of production across 14 industries in 45 regions from seven European countries since 1975. We estimate a structural equation derived directly from neoclassical trade theory that relates an industry?s share of a region?s GDP to factor endowments, relative prices and technology. Although factor endowments play a statistically significant and quantitatively important role in explaining production patterns, the Heckscher-Ohlin model is rejected against more general alternatives that allow for regional variation in relative prices and technology. Factor endowments are more successful at explaining patterns of production in aggregate industries (Agriculture, Manufacturing, Services) than in disaggregated industries within Manufacturing.