Does trade cause capital to flow?

Sebnem Kalemli-Ozcan

"Are trade and capital mobility complements or substitutes? The standard Heckscher-Ohlin theory postulates that they are substitutes since trade integration invalidates the need for capital to flow to capital-scarce countries. On the other hand, in a recent paper, Antras and Caballero (2009) show that in a world with varying degrees of financial development, trade and capital mobility become complements since trade integration increases the return to capital in less financially developed economies. In our paper, we provide evidence for this complementarity between trade and financial flows of Germany, France, the U.K. - as source countries, and the Ottoman Empire - as a host country, over 1859-1913. Given the provisionistic view of the Empire during this period, only a surplus agricultural production was exported after the Ottoman army was fed. This allowed us to match the...