Innovation, Spillovers and Economic Geography

Abstract: We develop a Schumpeterian quality-ladder spatial model in which innovation arrivals depend on regional knowledge spillovers. A parsimonious reduced-form diffusion mechanism induces the convergence of regions' average distance to the global frontier quality. As a result, regional differences in knowledge levels stem residually from asymmetries in the spatial distribution of researchers and firms. We analytically characterize the processes of innovation and knowledge diffusion. We then explore how the weight of intra-relative to inter-regional knowledge spillovers interacts with freer trade to shape the spatial distribution of economic activities. If intra-regional spillovers are relatively stronger, a higher economic integration leads to progressive agglomeration. If inter-regional spillovers dominate, researchers and firms may re-disperse after an initial phase of agglomeration as integration increases. This happens because firms and researchers have incentives to relocate to the smaller region, where they can leverage the concentrated knowledge base of the larger region while avoiding congestion in innovation. The smoothness of the dispersion process depends on the particular weight of intra-regional spillovers. If inter-regional spillovers become stronger as trade becomes freer, then the latter induces a monotone dispersion process. When integration is high enough, stable long-run equilibria always maximize the growth rate of the global frontier quality and the average distance to the frontier, irrespective of whether spillovers are mainly local or global.