Innovation Through Intra and Inter-Regional Interaction in Economic Geography

Abstract

We develop a two-region economic geography model with vertical innovations that improve the quality of manufactured varieties produced in each region. The chance of innovation depends on the related variety, i.e. the importance of interaction between researchers within the same region rather than across different regions. As economic integration increases from a low level, a higher related variety is associated with more agglomerated spatial configurations. However, if the interaction with foreign scientists is relatively more important for innovation, economic activities may (completely) re-disperse after an initial phase of agglomeration due to the increase in the relative importance of a higher chance of innovation in the less industrialized region. This non-monotonic relationship between economic integration and spatial imbalances may exhibit very diverse qualitative properties, not yet described in the literature.

Keywords: innovation, inter-regional spillovers, economic geography, re-dispersion