Empirical Evidence on Heckscher-Ohlin Trade Theorem : The Case of International Trade Between Croatia and the Rest of the European Union Member States

The goal of this research is to test the Heckscher-Ohlin' theorem of comparative advantages on the sample of the Republic of Croatia and other European Union member countries. Heckscher-Ohlin theorem of comparative advantages can largely explain international trade in cases where the sample of countries is heterogeneous, in terms of the achieved level of development and the production factors abundance. In regards to aforementioned research hypothesis was tested using several regression models. Based on the research results, it can be concluded that the international merchandise trade between Croatia and other European Union (EU) members is in accordance with the assumed by Heckscher-Ohlin comparative advantages theory. The difference in production factors abundance between Croatia and other European Union members better explains differences in production factor unit prices than net merchandise trade. Empirical testing show that merchandise trade between Croatia and other European Union members is correlated with the capital abundance. We found no significant correlation between merchandise trade and relative education level of Croatian labor force in regards to other EU countries. Furthermore, based on the empirical testing, it can be concluded that Croatia in regards to EU27 average, is a labor abundant country and net exports of Croatian manufacturing is labor intensive. Estimated results point out the production factor importance as a base for further merchandise exports development and economic development as a whole. Finally, basic conclusion is that Croatia needs to put more effort on investment attraction and therefore capital to labor ratio increase