Stages of diversification in a neoclassical world

•Factor accumulation explains at least one third of changes in industrial concentration over time.•Data used are a panel of 44 developed and developing countries over the period 1976-1990.•Results are based on a mainstream estimation of the production side of the Heckscher-Ohlin model.•Capital accumulation led poor countries to diversify their industrial production.•Rich countries concentrated their production in highly capital-intensive industries.

Recent research has documented a U-shaped industrial concentration curve over an economy's development path. How far can neoclassical trade theory take us in explaining this pattern? We estimate the production side of the Heckscher-Ohlin model using industry data on 44 developed and developing countries for the period 1976-2000. Decomposing the implied changes in industrial concentration over time shows that at least one third of these changes seems to be explained by a Rybczynski effect. This result suggests that capital accumulation led poor countries to diversify their industrial production, while rich countries made their production more concentrated in highly capital-intensive industries.