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Due to the nation having such extremely low wage production costs, it is actually cheaper for China to produce old goods with older and possibly more outdated technologies because they have a greater labor source at much less expensive costs than workers in more developed nations. What the country is lacking, however, is free capital from investors to structure strategies for producing future innovation. Investing in innovation creates the need to pay more skilled workers and tie up capital in projects that will not produce immediate results. This currently goes against China's basic export model, which is to produce cheap goods in massive quantities in order to flood the market as soon as possible. Thus, "China can produce old goods, but cannot as easily innovate and produce new goods" (Bloom, 2012). China itself benefits more from relying on older technologies to produce well in a cheaper fashion; however, this hinders its ability to spend time, effort, and funding in structures for future innovation.
Yet, this is not entirely a bad situation for China. As it continues to produce more and more foreign goods, it itself absorbs some of the older technological changes that work generated in foreign countries. As technologies evolve and then start to become more standard, they are introduced into China thus allowing for some level of technological change. This change is not based on internal innovation and discovery, but rather the assimilation of foreign tested production practices being adopted within the Chinese production force. Still, Coe (2007) also reminds of the situation that "OCED countries are also important since countries with flexible labor and product markets, with good educational institutions and training systems, and with effective employment and innovation policies will more easily and rapidly adapt to the challenges and opportunities from increased trade and off shoring." From this perspective, even nations which are using their low cost production to stay competitive can themselves also benefit from investing in innovation. When investments are made in increasing innovation, this only strengthens their competitive position within the international marketplace. As such, nations like China and India have recognized a need to reinvest into innovation policies and practices for future evolutions that will allow them to continuously stay on top of the market. Essentially, "there are different channels through which skilled biased innovation spillover from foreign to local firms" (Lee & Vivarelli, 2006).
Additionally, Gorodnicheno and Svejnar (2010) conducted another similar study in which the relationship between competition over trade and technological innovation was investigated. The study focused on 27 individual emerging markets, best looking at developing nations rather than nations that had already been considered developed. Yet, developed nations like United States were also used in the analysis as a secondary source of investigation. The study itself provides "robust evidence of a positive relationship between foreign competition and innovation and show that the supply chain of multinational enterprises and international trade are also important channels" (Gorodnicheno & Svejnar, 2010). Yet, Gorodnicheno & Svejnar (2010) go a step further than other investigations in order to differentiate the levels of innovation seen in service vs. manufacturing industries. Essentially, bursts of innovation are more common in manufacturing in relation to increasing competition and trade and service industries.
Looking at the literature which has been focused on trade competition and innovation, it is clear that there is a strong connection between the two. Developed nations which cannot compete with the low production costs of nations like China and India can use innovation as a way to restructure their attempt to stay competitive within the market. Additionally, nations that you have cheap production practices can also benefit from the innovative spirit coming from foreign firms in order to combine a new approach to old methods.
Bloom, N., M. Draca and J. Van Reenen (2011): Trade induced technical change? The impact of Chinese imports on innovation, IT and productivity. NBER Working Paper no. 16717.
Coe, David T. (2007). Globalization and Labor Markets: Implications of the Emergence of China and India. IMF. Web. http://www.bis.org/publ/bppdf/bispap50o.pdf
Gorodnichenko, Y., J. Svejnar & K. Terrell (2010): Globalization and Innovation in Emerging Markets. American Economic Journal: Macroeconomics, 2(2), pp. 194-226 (also available as NBER Working Paper no. 14481).
Lee, Eddy & Vivarelli, Marco. (2006). The Social Impact of Globalization in the Developing Counties. IZA. Web. http://ftp.iza.org/dp1925.pdf
Lerman, Robet I. & Schmidt, Stephanie R. (2010). An Overview of Economic, Social, and Demographic Trends Affecting the U.S. Labor Market. Futurework. United States Department of Labor. Web. http://www.dol.gov/oasam/programs/history/herman/reports/futurework/conference/trends/trendsVI.htm
Slaughter, Matthew J. & Swagel, Phillip. (1997). The Effect of Globalization on Wages in the Advanced Economies. International Monetary Fund. Neb. http://www.imf.org/external/pubs/ft/wp/wp9743.pdf[continue]
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