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

  • Diego Puga
  • Daniel Trefler

Increasingly, a small number of low-wage countries such as China and India are involved in innovation -- not 'big ideas' innovation, but the constant incremental innovations needed to stay ahead in business. We provide some 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. We explain why levels of involvement in innovation vary across low-wage countries and even across firms within each low-wage country. We then draw out implications for the location of production, trade, capital flows, earnings and living standards.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-193.

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Length: 31 pages
Date of creation: 26 Oct 2005
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-193
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  1. Grossman, G.M. & Helpman, E., 1989. "Quality Ladders And Product Cycles," Papers 152, Princeton, Woodrow Wilson School - Public and International Affairs.
  2. Marin, Dalia & Verdier, Thierry, 2006. "Power Inside the Firm and the Market: A General Equilibrium Approach," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 109, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  3. Elhanan Helpman & Gene M. Grossman, 2002. "Managerial Incentives and the International Organization of Production," NBER Working Papers 9403, National Bureau of Economic Research, Inc.
  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. Antras, Pol & Helpman, Elhanan, 2004. "Global Sourcing," Scholarly Articles 3196327, Harvard University Department of Economics.
  6. Marin, Dalia & Verdier, Thierry, 2004. "Globalization and the Empowerment of Talent," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 1, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  7. Gene M. Grossman & Elhanan Helpman, 2003. "Outsourcing Versus FDI in Industry Equilibrium," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 317-327, 04/05.
  8. Ethier, W.J. & Markusen, J.R., 1993. "Multinational Firms, Technology Diffusion and Trade," ISER Discussion Paper 0303, Institute of Social and Economic Research, Osaka University.
  9. Nunn, Nathan, 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," Scholarly Articles 4686801, Harvard University Department of Economics.
  10. Pol Antràs, 2005. "Incomplete Contracts and the Product Cycle," American Economic Review, American Economic Association, vol. 95(4), pages 1054-1073, September.
  11. Grossman, G.M. & Helpman, E., 1989. "Endogemour Product Cycles," Papers 10-89, Tel Aviv.
  12. Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing in a Global Economy," NBER Working Papers 8728, National Bureau of Economic Research, Inc.
  13. Barbara J. Spencer, 2005. "International Outsourcing and Incomplete Contracts," NBER Working Papers 11418, National Bureau of Economic Research, Inc.
  14. Melitz, Marc J, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," CEPR Discussion Papers 3381, C.E.P.R. Discussion Papers.
  15. 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.
  16. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, March.
  17. Puga, Diego & Trefler, Daniel, 2002. "Knowledge Creation and Control in Organizations," CEPR Discussion Papers 3516, C.E.P.R. Discussion Papers.
  18. repec:hrv:faseco:4784029 is not listed on IDEAS
  19. 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.
  20. 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.
  21. 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.
  22. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
  23. repec:rus:hseeco:122439 is not listed on IDEAS
  24. Grossman, G.M. & Helpman, E., 1989. "Endogenous Prduct Cycles," Papers 144, Princeton, Woodrow Wilson School - Public and International Affairs.
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