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Wake up and smell the ginseng: International trade and the rise of incremental innovation in low-wage countries

  • Diego Puga

    ()

    (IMDEA Social Sciences, Universidad Carlos III de Madrid, and CEPR)

  • Daniel Trefler

    ()

    (Rotman School of Management and Department of Economics, University of Toronto)

Increasingly, a small number of low-wage countries such as China and India are involved in incremental innovation. That is, they are responsible for resolving production line bugs and suggesting product improvements. We provide evidence of this new phenomenon and develop a model in which there is a transition from old style product cycle trade to trade involving incremental innovation in low-wage countries. The model explains why levels of involvement in incremental innovation vary across low-wage countries and across firms within each low-wage country. We draw out implications for sectoral earnings, living standards, the capital account and, foremost, international trade in goods.

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Paper provided by Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales in its series Working Papers with number 2009-01.

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Date of creation: 27 Jan 2009
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Publication status: Published in Journal of Development Economics, 91(1), January 2010: 64-76
Handle: RePEc:imd:wpaper:wp2009-01
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  1. Gene M. Grossman & Elhanan Helpman, 2005. "Outsourcing in a Global Economy," Review of Economic Studies, Oxford University Press, vol. 72(1), pages 135-159.
  2. Ethier, Wilfred J. & Markusen, James R., 1996. "Multinational firms, technology diffusion and trade," Journal of International Economics, Elsevier, vol. 41(1-2), pages 1-28, August.
  3. Grossman, Gene M & Helpman, Elhanan, 1991. "Endogenous Product Cycles," Economic Journal, Royal Economic Society, vol. 101(408), pages 1214-29, September.
  4. Philippe Aghion & Jean Tirole, 1994. "Formal and Real Authority in Organizations," Working papers 95-8, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Krugman, Paul, 1979. "A Model of Innovation, Technology Transfer, and the World Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 253-66, April.
  6. Gene M. Grossman & Elhanan Helpman, 2002. "Integration versus Outsourcing in Industry Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 85-120.
  7. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  8. Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing versus FDI in Industry Equilibrium?," Harvard Institute of Economic Research Working Papers 1965, Harvard - Institute of Economic Research.
  9. William R. Kerr, 2005. "Ethnic Scientific Communities and International Technology Diffusion," Harvard Business School Working Papers 06-022, Harvard Business School, revised Apr 2007.
  10. Casella, Alessandra & Rauch, James E., 2002. "Anonymous market and group ties in international trade," Journal of International Economics, Elsevier, vol. 58(1), pages 19-47, October.
  11. Puga, Diego & Trefler, Daniel, 2005. "Wake Up and Smell the Ginseng: The Rise of Incremental Innovation in Low-Wage Countries," CEPR Discussion Papers 5286, C.E.P.R. Discussion Papers.
  12. Pol Antras & Elhanan Helpman, 2003. "Global Sourcing," Harvard Institute of Economic Research Working Papers 2005, Harvard - Institute of Economic Research.
  13. Robert E Lucas, 1999. "Making a Miracle," Levine's Working Paper Archive 2101, David K. Levine.
  14. Raymond Vernon, 1966. "International Investment and International Trade in the Product Cycle," The Quarterly Journal of Economics, Oxford University Press, vol. 80(2), pages 190-207.
  15. Antras, Pol, 2003. "Firms, Contracts, and Trade Structure," Scholarly Articles 3196328, Harvard University Department of Economics.
  16. Diego Puga & Daniel Trefler, 2002. "Knowledge creation and control in organizations," Working Papers dpuga-02-01, University of Toronto, Department of Economics.
  17. John Sutton, 2001. "Rich trades, scarce capabilities : industrial development revisited," LSE Research Online Documents on Economics 2037, London School of Economics and Political Science, LSE Library.
  18. Grossman, Gene & Helpman, Elhanan, 2003. "Managerial Incentives and the International Organization of Production," CEPR Discussion Papers 3737, C.E.P.R. Discussion Papers.
  19. Elhanan Helpman, 2006. "Trade, FDI, and the Organization of Firms," Harvard Institute of Economic Research Working Papers 2118, Harvard - Institute of Economic Research.
  20. Gene M. Grossman & Elhanan Helpman, 1991. "Quality Ladders and Product Cycles," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 557-586.
  21. Barbara Spencer, 2005. "International outsourcing and incomplete contracts," Canadian Journal of Economics, Canadian Economics Association, vol. 38(4), pages 1107-1135, November.
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  24. Nathan Nunn, 2005. "Relationship Specificity, Incomplete Contracts and the Pattern of Trade," International Trade 0512018, EconWPA.
  25. repec:hrv:faseco:4784029 is not listed on IDEAS
  26. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  27. Pol Antràs, 2003. "Incomplete Contracts and the Product Cycle," NBER Working Papers 9945, National Bureau of Economic Research, Inc.
  28. Alla Lileeva & Daniel Trefler, 2007. "Improved Access to Foreign Markets Raises Plant-Level Productivity ... for Some Plants," NBER Working Papers 13297, National Bureau of Economic Research, Inc.
  29. John Sutton, 2001. "Rich Trades, Scarce Capabilities: Industrial Development Revisited," STICERD - Economics of Industry Papers 28, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  30. John Sutton, 2004. "The auto-component supply chain in China and India: a benchmark study," LSE Research Online Documents on Economics 2292, London School of Economics and Political Science, LSE Library.
  31. Grossman, Gene M. & Helpman, Elhanan, 2005. "Outsourcing in a Global Economy," Scholarly Articles 25586654, Harvard University Department of Economics.
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