The Roles of Innovators and Labor in a Schumpeterian Factor Endowments Based Model of Intra-industry Trade

This paper builds a model of Schumpeterian innovation and trade that emphasizes endowments of innovators and labor as a key factor in determining the pattern of trade. The model suggests a strong complementarity between intra-industry and inter-industry trade. The pattern of inter-industry vs intra-industry trade is analyzed using the Grubel–Lloyd index. The theoretical model predicts that the prominence of intra-industry trade is a nonlinear function of the ratio of the proportion of world knowledge domestically generated to the domestic share of the world labor supply. Strong empirical evidence for this key result is presented and implications are discussed.