Working Paper Series
The Effects of R&D Externalities in a Spatial Model
Abstract: This paper deals with the physical location of firms
although other interpretations are also possible. It is a well-known fact
that firms in certain industries tend to cluster. However, since you would
expect competition to be more intense when goods are less diversified in a
locational sense there must be some explanation to these observations which
is not usually dealt with in standard economic theory. One striking example
is of course the American west coast high-tech industry clustering in
Silicon Valley, but others are not difficult to find. There is a broad
range of possible explanations to these phenomena. The focus of this paper
is to explore the possibilities to explain c1ustering in terms of external
effects in the R&D process. This is done through the introduction of R&D
investments into a version of the Hotelling spatial duopoly model. We
consider only cost reducing innovations (i.e. process innovations). The
investment decisions and the locational decisions are taken simultaneously.
Then firms compete in prices, conditional on their choices in the first
period. Marginal costs are reduced both through own investments and by
spillovers from the competitor and these spillovers are decreasing in the
distance between firms. The most surprising finding is that clustering will
occur only if it is totally costless in terms of competition in the product
market, that is, only when both firms act as unconstrained monopolists.
Extending the model into an infinitely repeated game opens up the
possibility to sustain locational equilibria characterized by clustering if
the discount factor is large enough. This is so since the optimal collusive
locational pattern implies at least some amount of c1ustering.
Keywords: Research and development; Spillovers; Geographical location; (follow links to similar papers)
JEL-Codes: L22; O32; (follow links to similar papers)
19 pages, April 1990
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