This paper investigates firms' optimal location choice explicitly accounting for the role of inward and outward spillovers. A dynamic Cournot oligopoly with firms that are heterogeneous in their ability for carrying out cost-reducing R&D is considered. Firms can either locate in an industrial cluster or in isolation. Technological spillovers are exchanged between the firms in the cluster. It is shown that the technological leader has an incentive to locate in isolation only if her advantage exceeds a certain threshold. This threshold is increasing both in industry dispersion and in firms' discount rate. Scenarios are identified where although it is optimal for the technological leader to locate in the cluster, from a welfare perspective it would be desirable that she locates in the cluster.
Group for Research in Decision Analysis