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Wake up and smell the ginseng: International trade and the rise of incremental innovation in low-wage countries |
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| Authors: | Diego Puga Daniel Trefler |
| Institution: | a Madrid Institute for Advanced Studies (IMDEA), Social Sciences, Madrid, Spain b Department of Economics, Universidad Carlos III de Madrid, Madrid 126, 28903 Getafe, Spain c The Centre for Economic Policy Research, UK d Rotman School of Management and Department of Economics, University of Toronto, 105 Saint George Street, Toronto, Ontario, Canada M5S 3E6 e National Bureau of Economic Research, USA f Canadian Institute for Advanced Research (CIFAR), Canada |
| 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. |
| Keywords: | International trade Low-wage country innovation |
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