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Explaining Japan's Innovation and Trade: A Model of Quality Competition and Dynamic Comparative Advantage


  • Gene M. Grossman

    (Professor, Princeton University, Princeton, New Jersey, U.S.A.)


In this paper, I develop a model of dynamic comparative advantage based on endogenous innovation. Firms devote resources to R&D in order to improve the quality of high-technology products. Research successes generate profit opportunities in the world market. The model predicts that a country such as Japan, with an abundance of skilled labor and scarcity of natural resources, will specialize relatively in industrial innovation and in the production of high-technology goods. I use the model to explore the effects of R&D subsidies, production subsidies and trade policies on the long-run rates of innovation in the two trade partner countries and on the long-run pattern of trade.

Suggested Citation

  • Gene M. Grossman, 1990. "Explaining Japan's Innovation and Trade: A Model of Quality Competition and Dynamic Comparative Advantage," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 8(2), pages 75-100, September.
  • Handle: RePEc:ime:imemes:v:8:y:1990:i:2:p:75-100

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    References listed on IDEAS

    1. Stefania D’Amico & William English & David López‐Salido & Edward Nelson, 2012. "The Federal Reserve's Large‐scale Asset Purchase Programmes: Rationale and Effects," Economic Journal, Royal Economic Society, vol. 122(564), pages 415-446, November.
    2. repec:fip:fedgsq:y:2011:i:feb25 is not listed on IDEAS
    3. Fumio Hayashi & Junko Koeda, 2014. "Exiting from QE," NBER Working Papers 19938, National Bureau of Economic Research, Inc.
    4. Canlin Li & Min Wei, 2013. "Term Structure Modeling with Supply Factors and the Federal Reserve's Large-Scale Asset Purchase Progarms," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 3-39, March.
    5. Kameda, Keigo, 2014. "Budget deficits, government debt, and long-term interest rates in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 32(C), pages 105-124.
    6. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2011. "The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(2 (Fall)), pages 215-287.
    7. Thomas Laubach, 2009. "New Evidence on the Interest Rate Effects of Budget Deficits and Debt," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 858-885, June.
    8. repec:bla:jecrev:v:68:y:2017:i:4:p:443-457 is not listed on IDEAS
    9. Jack Meaning & Feng Zhu, 2011. "The impact of recent central bank asset purchase programmes," BIS Quarterly Review, Bank for International Settlements, December.
    10. Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2011. "The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases," International Journal of Central Banking, International Journal of Central Banking, vol. 7(1), pages 3-43, March.
    11. Junko Koeda, 2017. "Bond Supply and Excess Bond Returns in Zero-Lower Bound and Normal Environments: Evidence from Japan," The Japanese Economic Review, Japanese Economic Association, vol. 68(4), pages 443-457, December.
    12. Kazutoshi Kan & Yoshiyuki Kurachi & Yoshiyuki Fukuda & Shinichi Nishioka, 2013. "Japanese Life Insurance Companies' Balance-Sheet Structure and Japanese Government Bond Investment," Bank of Japan Review Series 13-E-2, Bank of Japan.
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    Cited by:

    1. Aggarwal, Aradhna, 2010. "Economic impacts of SEZs: Theoretical approaches and analysis of newly notified SEZs in India," MPRA Paper 20902, University Library of Munich, Germany.
    2. Stolpe, Michael, 1995. "Technology and the dynamics of specialization in open economies," Open Access Publications from Kiel Institute for the World Economy 738, Kiel Institute for the World Economy (IfW).
    3. Stadler, Manfred, 2015. "Innovation, industrial dynamics and economic growth," University of Tuebingen Working Papers in Economics and Finance 84, University of Tuebingen, Faculty of Economics and Social Sciences.
    4. Lutz, Stefan H., 2002. "Trade Policy: 'Political' vs. 'Economic' Factors," ZEW Discussion Papers 02-75, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    5. Siebert, Horst, 1991. "A Schumpeterian model of growth in the world economy: some notes on a new paradigm in international economics," Open Access Publications from Kiel Institute for the World Economy 1498, Kiel Institute for the World Economy (IfW).
    6. Asli Seda Bilman & Serdar Turkeli, 2013. "Interaction between international trade and economic growth: Evidence from qualitative comparative analysis," International Economics Letters, Transnational Press London, UK, vol. 2(4), pages 5-18, December.
    7. Stolpe, Michael, 1993. "Industriepolitik aus Sicht der neuen Wachstumstheorie," Open Access Publications from Kiel Institute for the World Economy 1568, Kiel Institute for the World Economy (IfW).
    8. Klodt, Henning, 1992. "Theorie der strategischen Handelspolitik und neue Wachstumstheorie als Grundlage für eine Industrie- und Technologiepolitik?," Kiel Working Papers 533, Kiel Institute for the World Economy (IfW).

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