Most U.S. innovation output comes from firms operating R&D facilities in multiple local markets. Does the geographical scope of such firms matter for growth, and is it
socially optimal? To address these questions, we first develop an endogenous growth model featuring multi-market innovative firms and local knowledge spillovers across innovative plants. In equilibrium, firms may operate in either too few or too many local markets, depending on how their local employment influences their own innovation output relative to its impact on knowledge spillovers to other firms. Second, we link the model to data on firm R&D locations, patents, and citation networks. Using an event study design, we document that firms’ spatial expansion increases spillovers to other firms. Our estimates of key model elasticities suggest that U.S. innovative firms operate in too few markets. Third, through quantitative counterfactuals, we show that incentives for broader expansion could be more effective at promoting growth than textbook R&D subsidies. Moreover, while R&D subsidies tend to be regressive, expansion incentives may help reduce regional inequality.
Join at: imt.lu/aula2