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

Listed author(s):
  • 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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File URL: http://repec.imdea.org/pdf/imdea-wp2009-01.pdf
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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
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. Helpman, Elhanan, 2006. "Trade, FDI and the Organization of Firms," CEPR Discussion Papers 5589, C.E.P.R. Discussion Papers.
  2. 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.
  3. Alessandra Casella & James E. Rauch, 1997. "Anonymous Market and Group Ties in International Trade," NBER Working Papers 6186, National Bureau of Economic Research, Inc.
  4. Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing versus FDI in Industry Equilibrium," Working Papers 148, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics.
  5. Robert E Lucas, 1999. "Making a Miracle," Levine's Working Paper Archive 2101, David K. Levine.
  6. 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.
  7. Gene M. Grossman & Elhanan Helpman, 1989. "Quality Ladders and Product Cycles," NBER Working Papers 3201, National Bureau of Economic Research, Inc.
  8. Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing in a Global Economy," Working Papers 149, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics.
  9. 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.
  10. Robert C. Feenstra & Andrew K. Rose, "undated". "Putting Things In Order: Patterns Of Trade Dynamics And Growth," Department of Economics 97-14, California Davis - Department of Economics.
  11. Aghion, Philippe & Tirole, Jean, 1994. "Formal and Real Authority in Organizations," IDEI Working Papers 37, Institut d'Économie Industrielle (IDEI), Toulouse.
  12. Pol Antràs, 2005. "Incomplete Contracts and the Product Cycle," American Economic Review, American Economic Association, vol. 95(4), pages 1054-1073, September.
  13. Diego Puga & Daniel Trefler, 2002. "Knowledge Creation and Control in Organizations," NBER Working Papers 9121, National Bureau of Economic Research, Inc.
  14. 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.
  15. 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.
  16. Barbara Spencer, 2005. "International outsourcing and incomplete contracts," Canadian Journal of Economics, Canadian Economics Association, vol. 38(4), pages 1107-1135, November.
  17. Pol Antràs, 2003. "Firms, Contracts, and Trade Structure," NBER Working Papers 9740, National Bureau of Economic Research, Inc.
  18. William R. Kerr, 2008. "Ethnic Scientific Communities and International Technology Diffusion," The Review of Economics and Statistics, MIT Press, vol. 90(3), pages 518-537, August.
  19. Pol Antras & Elhanan Helpman, 2003. "Global Sourcing," Harvard Institute of Economic Research Working Papers 2005, Harvard - Institute of Economic Research.
  20. Wilfred J. Ethier & James R. Markusen, 1991. "Multinational Firms, Technology Diffusion and Trade," NBER Working Papers 3825, National Bureau of Economic Research, Inc.
  21. Nathan Nunn, 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," The Quarterly Journal of Economics, Oxford University Press, vol. 122(2), pages 569-600.
  22. repec:hrv:faseco:4784029 is not listed on IDEAS
  23. Elhanan Helpman & Gene M. Grossman, 2002. "Managerial Incentives and the International Organization of Production," NBER Working Papers 9403, National Bureau of Economic Research, Inc.
  24. Grossman, G.M. & Helpman, E., 1989. "Endogemour Product Cycles," Papers 10-89, Tel Aviv.
  25. 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.
  26. Grossman, G.M. & Helpman, E., 1989. "Endogenous Prduct Cycles," Papers 144, Princeton, Woodrow Wilson School - Public and International Affairs.
  27. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, September.
  28. 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 253-266, April.
  29. 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.
  30. 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.
  31. James E. Rauch & Vitor Trindade, 2003. "Information, International Substitutability, and Globalization," American Economic Review, American Economic Association, vol. 93(3), pages 775-791, June.
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