Land Abundance, Risk and Return: A Heckscher-Ohlin Linear Programming Approach to FDI

Why is investment in human and physical capital in Latin America lower than in the faster growing economies of East Asia? Is this phenomenon and Latin America’s generally higher income inequality an important consequence of the input requirements and price variability of the regions’ products. To help answer these questions, this paper explores a Heckscher-Ohlin linear program incorporating real-world information on input intensities and product prices. It demonstrates: (1) that land abundance may deter skill accumulation and raise income inequality; (2) that insufficiently diversified production may create unfavorable capital risk-return profiles for resource rich countries, deterring investment; and (3) that the effect of such unfavorable profiles may be mitigated by international investors’ desire for a balanced portfolio of diversification cone assets. More generally, the paper provides an nice example of how a multi-sector, multi-factor linear program can be used to gain insight into a variety of pressing problems in international trade and development.