Trade integration and regional disparity in a model of scale-invariant growth

This paper explores the relation between trade integration, economic growth and regional inequality in a two-region model of endogenous industry location and scale-invariant growth. We depart from recent contributions of New Economic Geography in that our model does not exhibit the “strong” scale effect in R&D which is inconsistent with time-series evidence from advanced OECD economies. In contrast with previous research, we find that, when R&D spillovers are localized, trade integration affects economic growth only in the short-run; the sign of this (temporary) effect depends on whether intertemporal knowledge spillovers in R&D are positive or negative. We show that this result has important implications for the relation between trade integration and regional income disparity.