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A Regional Model of Endogenous Growth with Creative Destruction

We examine endogenous growth through vertical innovations in a two region model with partial regional and varietal knowledge spillovers. This paper extends the growth literature by adding a regional endogenous growth model with improvements in product quality, instead of a product variety engine for growth, where we account for partial knowledge spillovers in R&D. Starting with the quality ladders endogenous growth model we add traditional goods production by unskilled workers, location as a factor in R&D spillovers, migration of knowledge workers and vary the freeness of trade. Production of each manufactured variety is contestable through vertical innovation based on available knowledge and as a result, firms choose a location to maximise the productivity of R&D, maintain their niche monopoly and minimise transport costs. With contestability, knowledge spillovers provide for additional growth and the partial nature of spillovers causes an additional clustering effect encouraging agglomeration. Growth is highest when there is full agglomeration in one location, as knowledge spillovers are greater with manufacturing concentration. Agglomerated locations are reliant on local inter-varietal knowledge spillovers for growth while peripheral locations rely on trade and regional knowledge spillovers. In the long run, locations experience equal growth rates. If a location becomes agglomerated, it has higher long-run wages and higher growth rates during the transition to the long run. The model offers policy implications for lagging economies to improve inter-regional knowledge spillovers while agglomerated economies should be more concerned with business interaction within the region. Policies which reduce barriers to migration will increase long run growth rates by accelerating the transition to agglomeration.

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File URL: ftp://mngt.waikato.ac.nz/RePEc/wai/econwp/1202.pdf
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Paper provided by University of Waikato, Department of Economics in its series Working Papers in Economics with number 12/02.

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Length: 28 pages
Date of creation: 07 Apr 2012
Date of revision:
Handle: RePEc:wai:econwp:12/02
Note: Revised: 2012-09-01
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  1. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
  2. Gilles Duranton & Michael Storper, 2008. "Rising trade costs? Agglomeration and trade with endogenous transaction costs," Canadian Journal of Economics, Canadian Economics Association, vol. 41(1), pages 292-319, February.
  3. T. W. Swan, 1956. "ECONOMIC GROWTH and CAPITAL ACCUMULATION," The Economic Record, The Economic Society of Australia, vol. 32(2), pages 334-361, November.
  4. Martin, Philippe, 1998. "Public Policies, Regional Inequalities and Growth," CEPR Discussion Papers 1841, C.E.P.R. Discussion Papers.
  5. Koen Frenken & Ron A. Boschma, 2007. "A theoretical framework for evolutionary economic geography: industrial dynamics and urban growth as a branching process," Journal of Economic Geography, Oxford University Press, vol. 7(5), pages 635-649, September.
  6. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," UWO Department of Economics Working Papers 8904, University of Western Ontario, Department of Economics.
  7. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  8. Baldwin, Richard E & Forslid, Rikard, 2000. "The Core-Periphery Model and Endogenous Growth: Stabilizing and Destabilizing Integration," Economica, London School of Economics and Political Science, vol. 67(267), pages 307-24, August.
  9. Martin, Philippe & Ottaviano, Gianmarco, 1996. "Growing Locations: Industry Location in a Model of Endogenous Growth," CEPR Discussion Papers 1523, C.E.P.R. Discussion Papers.
  10. Alessandra Faggian & Philip McCann, 2009. "Human capital, graduate migration and innovation in British regions," Cambridge Journal of Economics, Oxford University Press, vol. 33(2), pages 317-333, March.
  11. Yamamoto, Kazuhiro, 2003. "Agglomeration and growth with innovation in the intermediate goods sector," Regional Science and Urban Economics, Elsevier, vol. 33(3), pages 335-360, May.
  12. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  13. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  14. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  15. Kyoko Hirose & Kazuhiro Yamamoto, 2005. "Knowledge spillovers, location of industry, and endogenous growth," Discussion Papers in Economics and Business 05-15, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  16. Philip McCann, 2007. "Sketching Out a Model of Innovation, Face-to-face Interaction and Economic Geography," Spatial Economic Analysis, Taylor & Francis Journals, vol. 2(2), pages 117-134.
  17. Alwyn Young, 1998. "Growth without Scale Effects," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 41-63, February.
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