As demonstrated by various studies, Japan has registered the dynamic changes in comparative advantage from unskilled labor-intensive to capital-intensive and further to R&D-intensive manufactured products.

Japan's innovation experience suggests that intense competition among a relatively large number of enterprises in a given industry not only encourages Schumpetarian innovations by rewarding innovators with above-average profits but also expedites spillovers of the innovation through competition and imitation among rivals. The dynamic evolution of comparative advantage through Schumpetarian innovations supported by R&D activities of private enterprises must be consistent with the static comparative advantage at a given point in time. This is because the relative endowments of domestic resources dynamically evolve over time through increasing inputs of R&D and physical capital relative to labor and natural resources. At a given time the domestic resource endowments should determine comparative advantage through efficient resource allocation due to intense competition.



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