Patterns of Technology, Industry Concentration, and Productivity Growth Without Scale Effects

This paper investigates the relationship between geographic patterns of industrial activity and endogenous growth in a two region model of trade that exhibits no scale effect. The in-house process innovation of manufacturing firms drives productivity growth and is closely associated with firm-level scales of production and relative levels of accessible technical knowledge. Focusing on long-run industry shares and a cross-region productivity gap, we find that dispersed equilibria with positive industry shares for both regions always produce higher growth rates than core-periphery equilibria with all industry locating in one region. Moreover, the highest growth rate arises in a symmetric steady state that features no productivity gap and equal shares of industry leading to the conclusion that the geographic concentration of industry has a negative impact on overall growth. Convergence towards a dispersed equilibrium, however, is contingent on the levels of inter-regional transport costs and knowledge dispersion. Finally, we explore the implications of greater economic integration arising from reduced transport costs and greater knowledge dispersion for patterns of industry and productivity, and for regional welfare levels within a dispersed equilibrium.