International R&D subsidy competition, industrial agglomeration and growth

I construct a model with endogenous growth and new economic geography. Using this framework, I consider the outcomes of R&D subsidy competition among countries under different trade costs. When trade costs are higher, less industrialized countries are more eager to attract industries with vertical linkages. To prevent the industries from relocating, more industrialized countries choose much higher R&D subsidies. As a result, the industries never relocate and the growth rate is very high. When trade costs decrease, countries are less willing to host industries with vertical linkages. R&D subsidy competition becomes less intense, and the growth rate decreases. (C) 2012 Elsevier B.V. All rights reserved.