Journal Article

Endowments, Output, and the Bias of Directed Innovation

Bernardo S. Blum

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 77, issue 2, pages 534-559
Published in print April 2010 | ISSN: 0034-6527
Published online April 2010 | e-ISSN: 1467-937X | DOI:
Endowments, Output, and the Bias of Directed Innovation

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In this paper, I ask the question: Does the output-mix of countries change in response to changes in factor endowments? If so: How long does it take? Using data on capital, as well as skilled and unskilled labour employed in three-digit International Standard Industrial Classification (ISIC) manufacturing industries for a sample of 27 developing and developed countries over the 1973–1990 period, I find that the output-mix of countries does not change in response to endowment changes, even after 15 years. This answer raises another question: How then do countries absorb changes in factor endowments? The data show that in both the short and long runs, an increase in the supply of a production factor reduces its rate of return and makes it more intensively used in all sectors of the economy: changes in production techniques. In the long run, the point estimate is that the reduction in the rate of return is more than 50% larger than in the short run. This is consistent with induced innovations being predominantly biased towards the scarce factor.

Journal Article.  10996 words.  Illustrated.

Subjects: Economics

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