Wake up and Smell the Ginseng: International Trade and the Rise of Incremental Innovation in Low-Wage Countries

Increasingly, a small number of lowwage countries such as China, India and Mexico are involved in incremental innovation. That is, they are responsible for resolving productionline bugs and suggesting product improvements. We provide evidence of this new phenomenon and develop a model in which there is a transition from oldstyle productcycle trade to trade involving incremental innovation in lowwage countries. The model explains why levels of involvement in incremental innovation vary across lowwage countries and across firms within each lowwage country. We draw out implications for sectoral earnings, living standards, the capital account and, foremost, international trade in goods.