Explaining Japan's Innovation and Trade: A model of Quality Competition and Dynamic Comparive Advantage
Gene M. Grossman
In this paper, I develop a model of dynamic comparative advantage based on
endogenous innovation. Firms in each of two countries devote resources to R&D
in order to improve the quality of high-technology products. Research
successes generate profit opportunities in the world market. The model
predicts that a country such as Japan, with abundance of skilled labor and
scarcity of natural resources, will specialize relatively in industrial
innovation and in the production of high-technology goods. Data are provided
to support this prediction. I use the model to explore the effects of R&D
subsidies, production subsidies and trade policies on the long-run rates of
innovation in trade partner countries and on the long-run pattern of trade.
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