R&D, trade in intermediate inputs, and the comparative advantage of advanced countries

•I study trade arising from the accumulation of physical capital and R&D stock.•Advanced countries specialize in R&D-intensive stages of high-tech industries.•I find no evidence that advanced countries specialize in capital-intensive sectors.•R&D is an important factor in explaining advanced countries’ comparative advantage.

This paper examines the accumulation of physical capital versus knowledge (R&D) capital as a determinant of advanced countries’ comparative advantage. I show that advanced countries are abundant in R&D resources, specialize in knowledge-intensive stages of high-technology industries, and outsource labor-intensive stages of the industries to labor-abundant countries. In contrast, global data on production and trade cannot support the conventional view that advanced countries specialize in and export capital-intensive goods. My results indicate that the accumulation of knowledge capital plays a vital role in explaining advanced countries’ comparative advantage.