Anna Iara / Iulia Traistaru
beyond this limit there is no incentive for further capital accumulation per worker and
consequently no growth. The only source of long run growth is the exogenous
technological advance (Fagerberg (2003)). The new growth models (Romer (1986,
1990), Lucas (1988), Grossman / Helpman (1991), Rivera-Batiz / Romer (1991), Aghion
/ Howitt (1992)) overcome this shortcoming by explaining technological progress as an
endogenous phenomenon and allowing for imperfect competition and increasing returns
to scale. In this framework, accumulation of factors such as localized collective
learning, accumulation of skills and technological innovation prevent returns to
investment from diminishing.
The more recent new economic geography models suggest that specialization
patterns may be the result of the spatial agglomeration of economic activities (Krugman
(1991a, 1991b), Krugman / Venables (1995), Venables (1996), Fujita / Krugman /
Venables (1999)). The main assumptions of these models are the presence of pecuniary
or technological externalities between firms, monopolistic competition and increasing
returns to scale. These new economic geography models imply that the reduction in
transport costs associated with increased integration lead to increased specialization and
divergence of industrial structures and generate regional differentials in growth and
factor accumulation. In these models, greater capital and labour mobility can increase
regional economic fluctuations and produce long-run divergent economic growth over
time. The main driving mechanism for regional divergence is increasing regional
specialization, making regions more vulnerable to random demand shifts and shocks.
Factor movements tend to accentuate rather than compensate for the effects of these
random shocks leading to regional economic divergence. In this context initial
differentials matter: regions with an initial higher advantage will see their leading
position reinforced. When transport cost become very low, factor costs considerations
are likely to prevail and some firms will move from the core to periphery. Thus, the
relationship between trade costs and agglomeration takes an inverted -U shape,
agglomeration in the core regions being the greatest at intermediate levels of trade costs.
A number of recent contributions bring together elements from endogenous
growth and new economic geography models and investigate the relationship between
location of economic activity and growth. (Martin / Ottaviano (1999, 2001), Baldwin /
Forslid (2000), Baldwin / Martin / Ottaviano (2001), Fujita / Thisse (2002a, 2002b),
Baldwin / Forslid / Martin / Ottaviano / Robert-Nicoud (2003)). The results of these
studies underline that falling trade costs foster a core-periphery pattern of economic