The great realignment: How factor-biased innovation reshaped comparative advantage in the U.S. and Japan, 1970-1992

Recent changes in comparative advantage in the largest OECD economies contradict static Heckscher-Ohlin-Vanek theory. Japan's rising share of machinery exports and the improved comparative advantage of the USA in heavy industry were accompanied by growing scarcities of factors used intensively in these sectors. We show that under factor-price equalization, directed technical change leads to increasing specialization in goods intensive in each country's abundant factor. Testing this hypothesis with 1970-1992 export data from 14 OECD countries, we find that international comparative advantage was reshaped by biased innovation in the largest economies that increased the effective stocks of their abundant factors.