Innovation through intra and inter-regional interaction in economic geography

TL;DR

This paper presents a two-region economic geography model showing how intra- and inter-regional interactions influence spatial economic configurations and innovation, revealing complex non-monotonic effects of economic integration.

Contribution

It introduces a novel two-region model incorporating vertical innovations and related variety, highlighting how different interaction patterns affect spatial economic outcomes.

Findings

Higher related variety promotes agglomeration at low integration levels.

Foreign interaction can cause re-dispersion after initial agglomeration.

Non-monotonic relationship between integration and spatial imbalance.

Abstract

We develop a two-region economic geography model with vertical innovations that improve the quality of manufactured varieties produced in each region. The chance of innovation depends on the \emph{related variety}, i.e. the importance of interaction between researchers within the same region rather than across different regions. As economic integration increases from a low level, a higher related variety is associated with more agglomerated spatial configurations. However, if the interaction with foreign scientists is relatively more important for innovation, economic activities may (completely) re-disperse after an initial phase of agglomeration due to the increase in the relative importance of a higher chance of innovation in the less industrialized region. This non-monotonic relationship between economic integration and spatial imbalances may exhibit very diverse qualitative properties, not yet described in the literature.