Working Paper No. 616

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

Published: April 6, 2004Pages: 48Keywords: Monopolistic Competition; R&D; High-Tech Production; Agglomeration Economies JEL-codes: F12; F23

Location of R&D and High-Tech Production by Vertically Integrated Multinationals Karolina Ekholm and Katariina Hakkala


This paper presents evidence that, in Europe, production of high-tech goods is attracted to large markets, while R&D activities tend to be located away from them. In order to explain this phenomenon, we develop a two-country general equilibrium model where firms make separate choices about the location of R&D and high-tech production. There are two agglomeration forces: R&D spillovers and a home-market effect creating incentives for firms to locate production in the relatively large market. We show that, for relatively weak R&D spillovers and intermediate trade costs, the smaller economy tends to specialize in R&D. We also discuss the welfare consequences of different outcomes with respect to the location of R&D, showing that while skilled labor may gain from hosting an agglomeration of R&D activities, unskilled labor will lose.

 

An Agenda for Europe

Institutional Reform for Innovation and Entrepreneurship

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The authors of this book, Niklas Elert, Magnus Henrekson and Mikael Stenkula, advise the economies of the European Union to become more entrepreneurial in promoting innovation and economic growth. The authors propose a reform strategy with respect to several aspects to achieve this goal.

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