The authors present a theory of spatial development. Manufacturing and services firms located in a continuous geographic area choose each period how much to innovate. Firms trade subject to transport costs and technology diffuses spatially across locations. The result is a spatial endogenous growth theory that can shed light on the link between the evolution of economic activity over time and space. Economic development varies widely across space. It is a common observation, as stated in the 2009 World Development Report, that the location of people is the best predictor of their income.