Location of R&D and High‐Tech Production by Vertically Integrated Multinationals *

This article extends the theory of multinational firms by allowing for agglomeration forces in firm‐level activities such as R&D as well as in production. We develop a two‐country general‐equilibrium model where firms make separate choices about the location of R&D and production. There are R&D spillovers and a home‐market effect creating incentives for firms to locate production in the relatively large market. For relatively weak R&D spillovers and intermediate trade costs, the smaller economy tends to specialise in R&D. While skilled labour may gain from hosting an agglomeration of R&D activities, unskilled labour