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

Author

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  • 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)

Abstract

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.

Suggested Citation

  • Diego Puga & Daniel Trefler, 2009. "Wake up and smell the ginseng: International trade and the rise of incremental innovation in low-wage countries," Working Papers 2009-01, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales.
  • Handle: RePEc:imd:wpaper:wp2009-01
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    international trade; low-wage country innovation;

    JEL classification:

    • F1 - International Economics - - Trade

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