Agglomeration and regional growth policy: externalities versus comparative advantages

This paper explores the existence of different types of static and dynamic externalities and shows the relationship between externalities, interregional trade, and cluster policy. By guiding policy in choosing the most appropriate strategy for facing some frequent dilemmas, this paper has clear implications in regional development policy and adds to the existent literature in three ways. First, it contributes to a better characterization of dynamic externalities by extending the “advantages of backwardness” approach, formerly developed to explain the catching-up of national economies, to the regional context. Second, the paper presents a new model that relates static and dynamic externalities to the clustering mode of production in the regional context. Third, the paper contributes to give a more accurate theoretic basis to the regional cluster policy and to help policy-makers in choosing the right policy for increasing the well-being of depressed regions. The major conclusion is that policy must pursue a combination of the comparative advantage principle with one type of dynamic externalities uncovered in this paper: the “related variety benefits” of agglomeration. Copyright Springer-Verlag Berlin Heidelberg 2014