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This paper analyses a two-region model with vertical innovations that enhancethe quality of varieties of the horizontally differentiated manufacturesproduced in each of the two regions. We look at how the creation and diffusionof knowledge and increasing returns in manufacturing interact to shape thespatial economy. Innovations occur with a probability that depends on theinter-regional interaction between researchers (mobile workers). We find that,if the weight of interaction with foreign scientists is relatively moreimportant for the success of innovation, the model accounts for re-dispersionof economic activities after an initial stage of progressive agglomeration astransport costs decrease from a high level.

Innovation through intra and inter-regional interaction in economic geography