Working Paper: CEPR ID: DP5286
Authors: Diego Puga; Daniel Trefler
Abstract: Increasingly, a small number of low-wage countries such as China and India are involved in innovation - not the `big ideas', but the constant incremental innovations needed to stay ahead in business. We provide some evidence of this 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 in each low-wage country. We then draw out the implications of this for the location of production, trade, capital flows, earnings and living standards.
Keywords: International Trade; Low-Wage Country Innovation
JEL Codes: F1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| local agent involvement in innovation (O36) | reduced innovation costs (O36) |
| local agent involvement in innovation (O36) | reduced production costs (D24) |
| local agent involvement in innovation (O36) | residual incompatibilities (L15) |
| residual incompatibilities (L15) | offset benefits of local innovation (O36) |
| similarity of blueprints (C59) | debugging effort required (C59) |
| local agent involvement in innovation (O36) | transition from traditional product cycle trade to trade based on incremental innovation (O39) |