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Models in the area of endogenous growth concentrate on the developments of countries with a fixed endowment of factors of production. In Discussion Paper No. 1267, Uwe Walz extends the endogenous growth approach to a regional setting. This paper presents a dynamic, two-region general equilibrium model in which inter-regional production and trade patterns are endogenously determined. By allowing for transport costs and factor mobility spatial issues are explicitly taken into account. Localised growth stems from geographical concentration of an industrial sector exhibiting permanent productivity increases. Geographical concentration is due to the interaction of the size of local markets and local competition in the differentiated input industry. Regional factor endowment with an immobile factor is decisive for long-run specialisation, trade and growth patterns between regions if large endowment differences prevail. With equally-sized regions, multiple equilibria exist. The paper finds that integration might lead to increasing regional concentration of production and growth. There are various policy measures to boost the growth performance of a periphery region: this analysis suggests an `infant-region' policy. It can be sensible for a region to join an economic union with more advanced regions only after its own technological situation has matured sufficiently to avoid the process of becoming the periphery in the economic union. Furthermore, investment in the immobile factor (infrastructure) as a means of enlarging a region's endowment is a possible growth-enhancing policy. But care must be taken with respect to this measure because investment in road and transport infrastructure can lead to lower transport costs and hence to sharper differences in innovation patterns.
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