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This paper investigates the relationship between geographic patterns of economic activity and productivity growth in a two region model of trade and endogenous growth without scale effects. At the core of the model is the production and in-house innovation activities of manufacturing firms and, in a world of transport costs, imperfect knowledge dispersion and perfect capital mobility, these activities are located independently in the region that provides the lowest associated cost. In recent years there has been considerable interest in understanding the implications of the geographic distribution of industrial activity for patterns of economic growth at the local, regional, and international levels.
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