Industrial Agglomeration: Economic Geography, Technological Spillover And Policy Incentives

In the Marshallian Industrial District (MID) agglomeration of firms is due to technological spillover, a positive externality rising from communication and interaction of firms and which allows an increased availability and quality of specialized labour. These centripetal force is balanced by centrifugal forces like congestion costs and increased prices of specific factors due to the increased local demand. On the other hand, the New Economic Geography (NEG) approach on firm location focuses its attention on pecuniary rather than technological advantages deriving from belonging to an industrial cluster. This in turn implies that a region has specific welfare, real wage or utility advantages when an industrial clustered is located within it. Because of these advantages, there may be incentives for “industry grabbing” policies and tax competition between nations or regions. We analyse the case of policy incentives in a NEG framework with technological spillover in the R&D sector. In this framework subsidizing R&D in the industrial region could lead to some welfare improvement.