Research and Development, Regional Spillovers and the Location of Economic Activities

I present an endogenous growth model that studies the effects of local inter‐industry and intra‐industry knowledge spillovers in R&D on the allocation of economic activities between two regions. The equilibrium is the result of a tension between a centripetal force, the cost of transporting goods from one region to the other, and a centrifugal force, the cost increase associated with life in a more crowded area. The presence of local knowledge spillovers, which determines the concentration of the R&D activities within one region, also introduces a further centripetal force that makes a symmetric allocation of the economic activities impossible. The concentration of R&D fosters the equilibrium rate of growth of the economy with respect to the case of no‐integration, by increasing the positive effect of local knowledge spillovers. Contrary to the findings of the majority of models in the new economic geography literature, within this framework a reduction in transport costs may be associated with a more even geographical distribution of economic activities.