Productivity Growth and Patterns of Industry Location Without Scale Effects

This paper investigates the relationship between geographic patterns of economic activity and productivity growth in a two region model of trade and endogenous growth without scale effects. At the core of the model is the production and in-house innovation activities of manufacturing firms and, in a world of transport costs, imperfect knowledge dispersion and perfect capital mobility, these activities are located independently in the region that provides the lowest associated cost. In contrast to the existing literature, we remove scale effects by shifting the focus from aggregate research and development activity to innovation at the level of individual product lines and find that although industry concentration raises the level of product variety, it reduces the rate of productivity growth so that the pace of economic growth is highest when industry is equally dispersed across regions. We also study the effects of greater economic integration between regions and find that increases in the freeness of trade and the level of knowledge dispersion both have negative effects on productivity growth while raising the level of product variety. These opposing effects for growth and product variety lead to mixed results for the impacts of economic integration on regional welfare.