Summary
This theoretical paper develops a model of industry location, R&D led growth and inter-regional inequality with three distinctive features; an endogenous market structure characterised by oligopolistic firms conducting R&D, agglomeration externalities (knowledge spillovers) at the local level and migration costs. Localised knowledge spillovers encourage the spatial concentration of industries. The endogenous market structure allows the studying of the interaction between R&D, growth and firms' market power, with the implication that the spatial concentration of industries is associated with fewer, but more innovative, firms. Migration costs, on the other hand, limit the geographical concentration of economic activities.
For example, the greater the strength of knowledge spillovers, the more firms will engage in R&D, which increases growth rates, but also increases mark-ups, as labour reallocates away from production, thereby reducing the equilibrium number of firms, giving the remaining firms more market power. But not all firms necessarily operate in the most productive region, as migration across locations is costly. The authors show that increasing localised spillovers in either the poorer or in the richer region fosters growth, hence increases welfare. Moreover, policies aimed at increasing spillovers in the poorer region have larger aggregate effects. Therefore, such policies have the potential to decrease regional inequalities without sacrificing growth in the aggregate.
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Authors
Marta Aloi, Joanna Poyago-Theotoky and Frederic Tournemaine
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Posted on Thursday 15th March 2018