We find strong evidence of this relocation pattern in establishment relocations across French employment areas 1993-1996. Our results suggest that the long-run outcome is dependent on spillovers. It is found that when they are weak, firms dig their niche over time, differentiation remains important and cost-reduction keeps going. By contrast, if spillovers are strong and if the diffusion function of spillovers is concave, firms tend to agglomerate towards the center of the market and to use similar technologies. This standardization process involves less and less investment and may induce instability in the industry.
Standardization leads to a fall in the growth rate of productivity.
For spillovers of intermediate strength, complex technological landscapes may arise. To answer these and related questions, we first distil some key stylised facts from the empirical literature on cities and the composition of their activities. We then turn to a review of different theories looking at such issues, and study the extent to which these theories contribute to the understanding of the empirical regularities. Although seldom modeled outside the monopolistic competition framework, market incompleteness and imperfect competition are central to the new growth theories. We propose here a strategic model of imperfect competition with endogenous growth and endogenous market structure where we focus on labor market issues.