Product Cycle, Knowledge Capital and Comparative Advantage∗

This paper empirically investigates the effect of product cycle on comparative advantage for countries with different knowledge capital endowment. Product cycle is the exogenous nature of technology evolution in each industry. Longer product cycle means new discovery takes longer time to arise. Meanwhile the imitation of existing innovation is easier in industries with longer product cycles. Standard Heckscher-Ohlin model predicts that countries with more knowledge capital endowment have comparative advantage in doing innovation in industries with longer product cycles. However, the higher imitation risk drives countries’ innovation activities away from industries with longer product cycles. We measure the product cycle length using patent citation data. Using bilateral trade data from 2002 to 2006, we find that countries with more knowledge capital endowment export more in industries with shorter product cycles, suggesting a dominant role for imitation risk in shaping the trade pattern. We further show that this baseline pattern is mitigated when the industry R&D requirement is more intensive and when the intellectual property rights are well protected.