"Wake up and smell the ginseng"

A good paper in the recent issue of the Journal of Development Economics - the premier development journal.

The paper attempts to model incremental innovation in low wage economies such as China and India. The model makes sense and this represents a potentially important paper.

Puga and Trefler and premiership academics - this is a quality piece of work.

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

Diego Puga and Daniel Trefler

Received 12 September 2007;
revised 27 January 2009;
accepted 27 January 2009.
Available online 9 February 2009.

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

JEL classification codes: F1

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