This article builds an understanding of regional innovation specialisation by developing a multi-sector model with endogenous growth through quality improving innovations and spillovers from related technologies. The model provides an approach to incorporate the relatedness literature within the mainstream theoretical frameworks of endogenous growth and economic geography. Each firm’s technology sector and the location of other firms play a role in each firm’s ability to improve its own technology. As a result, firms prefer to co-locate in technologically compatible clusters. Without relying on scale assumptions, the model for the first time coherently links related variety knowledge spillovers to mainstream urban economic frameworks and demonstrates that clustering is possible in both core and peripheral areas.

This report considers evidence about the existence and scale of agglomeration economies, including in Australian cities. It examines whether city size affects productivity, and whether economic productivity, city size and rising housing costs are interdependent.

The so‐called “new growth theory” is characterized by the now Nobel Prize winning insight that ideas are a nonrival input to and output from endogenous investment in innovation. Nonrivalry implies increasing returns to scale, but this also unintentionally creates an empirically disputed scale effect that a growing population implies an ever‐increasing growth rate. Empirical evidence supports fully‐endogenous growth without scale effects, but theoretical issues sustain the decades‐long dispute over exactly how to negate the scale effect. This article surveys theoretical approaches to resolving the scale effect and shows how four generations of endogenous growth theory are defined by the maturing of modeling techniques for constraining increasing returns. The synthesis suggests that the dispute over scale effects is really a narrative about how the powerful application of increasing returns has followed a standard theoretical development pattern. This implies that a fourth generation is now emerging that negates the scale effect while retaining fully‐endogenous growth without relying on assumptions of linearity. Instead, the market response to excessive increasing returns to innovation constrains explosive growth by expanding the market, rather than by a linear assumption. This latest class of endogenous growth models may be the final chapter to resolving the long‐running dispute.

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This article analyses the relationship between compatibility and innovation in markets with network effects using a model of competition with endogenous R&D, commercialization and compatibility. Incumbent acquisition of an innovation or profit from entry provides entrepreneurs with an incentive for developing technological improvements. Entrepreneurs receive greater returns for the innovation if larger incumbents offer compatibility with their installed base. As a result, entrepreneurs must innovate strategically to pre-empt an incompatibility response from incumbents. Similarly, small incumbents also bid strategically to block entry or rival acquisition if it also avoids an incompatibility response from a larger incumbent. A credible threat of incompatibility reduces the entrepreneur's reserve to sell an innovation, but can also increase offers to acquire the innovation from smaller incumbents attempting to avoid incompatibility. This leads to a complex relationship between the strength of network effects, innovation incentives, the entrepreneur's ambition for improvement and potentially disrupting the compatibility regime. For weak to moderate network effects entrepreneurs are likely to target more substantial, but improbable innovations such that their network is sufficiently attractive for incumbents to offer compatibility. For a small range of sufficiently strong network effects, entrepreneurs target incremental innovations to avoid the incumbent threatening incompatibility. JEL classifications: L15, L26, L50, O31Abstract This article analyses the relationship between compatibility and innovation in markets with network effects using a model of competition with endogenous R&D, commercialization and compatibility. Incumbent acquisition of an innovation or profit from entry provides entrepreneurs with an incentive for developing technological improvements. Entrepreneurs receive greater returns for the innovation if larger incumbents offer compatibility with their installed base. As a result, entrepreneurs must innovate strategically to pre-empt an incompatibility response from incumbents. Similarly, small incumbents also bid strategically to block entry or rival acquisition if it also avoids an incompatibility response from a larger incumbent. A credible threat of incompatibility reduces the entrepreneur's reserve to sell an innovation, but can also increase offers to acquire the innovation from smaller incumbents attempting to avoid incompatibility. This leads to a complex relationship between the strength of network effects, innovation incentives, the entrepreneur's ambition for improvement and potentially disrupting the compatibility regime. For weak to moderate network effects entrepreneurs are likely to target more substantial, but improbable innovations such that their network is sufficiently attractive for incumbents to offer compatibility. For a small range of sufficiently strong network effects, entrepreneurs target incremental innovations to avoid the incumbent threatening incompatibility.JEL classif...

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