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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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  • Puga, Diego
  • Trefler, Daniel

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

  • Puga, Diego & Trefler, Daniel, 2010. "Wake up and smell the ginseng: International trade and the rise of incremental innovation in low-wage countries," Journal of Development Economics, Elsevier, vol. 91(1), pages 64-76, January.
    • Handle: RePEc:eee:deveco:v:91:y:2010:i:1:p:64-76
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    Keywords

    International trade Low-wage country innovation;

    JEL classification:

    • F1 - International Economics - - Trade

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