The Capital Matthew Effect: Directed Technical Change and International Capital Flows

This study shows that technological specialization is one plausible driver of long‐term international capital flows. Capital scarcity raises marginal returns but also steers countries toward capital‐saving technologies. As a result, capital‐rich countries adopt capital‐complementary technologies and keep importing capital from poorer countries that favor capital‐substitute innovations. This divergence force on capital allocation, which we name the capital Matthew effect , offsets convergence from diminishing returns. The mechanism offers a unified explanation for puzzles like the Lucas paradox and global imbalances. Finally, we provide both country‐level and firm‐level evidence supporting this new model mechanism.