Working Paper Series in Economics and Institutions of Innovation,
Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

Abstract: This paper provides an overview and critical assessment of co-location and clustering in space. Basic location conditions include accessibility to customers, input suppliers including knowledge providers, and regional endowments. A distinction is made between slow and fast location adjustments. In a basic model, it is shown how distance sensitivity and scale economies generate self-reinforcing location externalities. Variations of the same model are employed to illuminate how urbanisation economies can stimulate co-location and clustering. One model variant is designed to examine how innovation activities also can be influenced by urbanisation economies. The paper concludes that a set of basic principals form the basis for localisation and urbanisation economies. However, there remains a challenging gap between model predictions and empirical observations.

Keywords: Location; co-location economies; agglomeration economies; urbanisation economies

JEL-codes: L14; L29; O30; R30

30 pages, May 31, 2006

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