Asymmetric Knowledge Spillovers in a Model of Regional Innovation and Growth

This paper formulates a theoretical model to investigate the determinants of the rate of innovation across economies that differ in important ways in industrial structure and face the possibility of asymmetric knowledge spillovers between industries. In particular, I wish to extend the model of expanding product variety in order to study the implications of a highly diversified sectoral composition across regional industrial bases on rates of economic innovation. A global knowledge spillover has long been recognized as a possible explanation for the absence of scale effects. What has not been appreciated is the unstable nature of the equilibrium associated with this explanation. The model can, therefore, be used to understand how, in a dynamic setting, certain regions, such as Silicon Valley or the high-tech corridor stretching along Route 28 from northern Massachusetts into southern New Hampshire, become centers of innovative activity while other regions' industries fade in importance. These results suggest a strong role for regional economics in interpreting the results of new growth theory.