Location, innovation and trade: The role of localization and nation-based externalities

This paper models locales that produce goods for trade outside their boundaries. We use a model that assumes monopolistic competition in both service and traded goods sectors; and, influenced by Porter (The Competitive Advantage of Nations, The Free Press, New York, 1990), we study the impact of both a localization externality and a nation-based externality. The localization externality is related to innovation that occurs because of agglomeration in the locale. The nation-based externality reflects the idea that some nations promote competitive industries more successfully than do others. We identify two types of comparative statics effects related to two distinct results of innovation.