Agglomeration and Growth

An attempt is made to assess how agglomeration per se contributes to economic growth. A one-factor-two-good innovation model has been used to show how agglomeration of firms accounts for the expansion of innovation (that is, growth rate) through localized externalities. This simple theoretical model shows how agglomeration itself may add extra gains to economic growth independent of the common factors of economic growth that have been controlled for. The contribution of agglomeration to growth is inferred from the difference in innovation rates between regionally concentrated innovation and regionally diverse and symmetric one. While indisputably helpful to growth at the local level, agglomeration may not induce growth on a larger scale, for example, at the national level or at the global one. Agglomeration may also cause uneven income distribution as it does not uniformly increase real income across regions and may sustain the wage rate gap across regions.