A multi-sector model of relatedness, growth and industry clustering

Abstract

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.

The unintended consequences of increasing returns to scale in geographical economics

“…While existing research can be appropriately qualified, there is ample opportunity to also utilise a more modern understanding of endogenous growth such as Peretto (2018), Akcigit and Kerr (2018) or with appropriate modifications to ensure scale-neutrality. Bond-Smith et al (2018) andBond-Smith andMcCann (2019) make initial progress by utilising a scale-neutral approach to endogenous growth in two-region models, but limitations in Young (1998) limit their focus to the spatial mechanisms in the model. More complex endogenous growth models that are scale-neutral offer greater opportunity to understand the spatial consequences of innovation directly.…”

“…As a result, many two region models of endogenous growth inadvertently draw conclusions about spatial forces that are a result of assumptions about growth and scale. Instead a scale-neutral approach (Bond-Smith et al, 2018;Bond-Smith and McCann, 2019) allows spatial mechanisms to deliberately drive the spatial forces in such models. These issues are not only limited to models with footloose labour.…”

“…Although this leads to the desired result of constant growth in an aspatial growth model, despite a growing population, in geographic space it unintentionally amplifies the effect of concentrating research effort and dispersing ideas without a spatial foundation for such forces. Schumpeterian growth models without scale effects have the potential for a scale-neutral approach (Bond-Smith et al, 2018;Bond-Smith and McCann, 2019) that enables only the included spatial mechanisms to affect the spatial equilibrium rather than implicit assumptions about growth and scale effects.…”

“…) andBond-Smith and McCann (2019) use a scale-neutral innovation production function based onYoung (1998) such that the spatial equilibrium is only affected by the intended spatial mechanisms of transport costs, knowledge spillovers and related variety clustering.…”

The Day After Covid-19: Implications for Growth, Specialization, and Inequality

“…Its canonical setting is the so-called core-periphery model (Krugman, 1991), which was merged with Romer's (1990b) endogenous growth model by Baldwin and Forslid (2000). Among the numerous subsequent core-periphery growth models, the paper closest to ours is Bond-Smith and McCann (2020), with whom we share a focus on innovation, the presence of multiple sectors, and footloose skilled workers (i.e. freely choosing location in response to wage pressure).…”