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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. Philippe Aghion & Jean Tirole, 1994. "Normal and Real Authority in Organizations," Working papers 94-13, Massachusetts Institute of Technology (MIT), Department of Economics.
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  4. 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.
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  8. Helpman, Elhanan, 2006. "Trade, FDI and the Organization of Firms," CEPR Discussion Papers 5589, C.E.P.R. Discussion Papers.
  9. 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.
  10. Barbara J. Spencer, 2005. "International Outsourcing and Incomplete Contracts," NBER Working Papers 11418, National Bureau of Economic Research, Inc.
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  19. repec:hrv:faseco:4784029 is not listed on IDEAS
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  25. 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.
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  27. 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.
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