Industrial heterogeneity and international product cycles
This paper proposes a model of quality ladder in the context of North–South trade to examine the emergence of product cycles in industries of different research and development (R&D) intensity levels. To acquire the dominant advantage, firms as a whole can strategically undertake either quality upgrades through R&D or cost saving through the channels of market penetration—foreign direct investment (FDI) or offshoring. In an infinite-horizon game, the uses of mixing moving-up and moving-out strategies in high-tech and medium-tech industries generate product cycles. Furthermore, in low-tech industries, FDI is a strongly dominant strategy for the industry leaders and followers. Under certain conditions, firms leapfrog over each other and product cycles thus emerge.
KeywordsNorth–South trade Industrial heterogeneity Vertical innovation Penetration channels International product cycles
JEL ClassificationC72 D21 F12 F23
We are indebted to the editor-in-chief, two referees, Haitao Mao, Wenshou Yan, Xiaopeng Yin and Qi Zhang for constructive comments and helpful suggestions. Also, we are grateful for many useful comments and discussions by conference participants at 2016 Asia Meeting of Econometric Society in Japan and 2017 Annual Meeting of Chinese Society of International Trade.
- Dixit A, Stiglitz J (1977) Monopolistic competition and optimum product diversity. Am Econ Rev 67:297–308Google Scholar
- Dollar D (1986) Technological innovation, capital mobility, and the product cycle in North–South trade. Am Econ Rev 76:177–190Google Scholar
- Feenstra RC, Hanson GH (2005) Ownership and control in outsourcing to China: estimating the property-rights theory of the firm. Q J Econ 120:729–761Google Scholar
- Flam H, Helpman E (1987) Vertical product differentiation and North–South trade. Am Econ Rev 77:810–822Google Scholar
- Liu X (2010) China’s development model: an alternative strategy for technological catch-up. In: Fu X, Soete L (eds) The rise of technological power in the South. Palgrave Macmillan, BasingstokeGoogle Scholar
- Savsin S (2011) China’s integration in foreign trade: revealed comparative advantage analysis for Sweden in relation with China. Research paper. Örebro University, SwedenGoogle Scholar