Growing location: Industry location in a model of endogenous growth

This paper constructs a model of endogenous growth and endogenous industry location where the two interact. We show that with global spillovers in R&D, a high growth rate and a high level of transaction costs are associated with foreign direct investment to the South (the location with a low initial wealth). With local spillovers in R&D, this activity is agglomerated in the North and the rate of innovation increases with the concentration of Þrms in the North. This in turn implies that a decrease of transaction costs, through its impact on economic geography, will increase the growth rate. We show that industrial concentration can be beneÞcial for both regions if its impact on the rate of innovation is large enough to compensate the South for the loss of industry. This will be the case only for low enough transaction costs and high enough spillovers. ( 199