Explaining Japan's Innovation and Trade: A Model of Quality Competition and Dynamic Comparative Advantage
Gene M. Grossman
In this paper, I develop a model of dynamic comparative advantage based on endogenous innovation. Firms 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 an abundance of skilled labor and scarcity of natural resources, will specialize relatively in industrial innovation and in the production of high-technology goods. 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 the two trade partner countries and on the long-run pattern of trade.
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