A Dynamic Model of Firms’ Strategic Location Choice

This paper analyzes the optimal location choice of a firm in a dynamic Cournot framework, in which firms’ absorptive capacities may depend on their knowledge stock. The firm decides whether to locate irreversibly in a cluster or in isolation. In the cluster the firm benefits from inward spillovers from its competitors, but also generates outward spillovers. If the firm chooses to locate in isolation no knowledge flows occur. All firms’ production costs are determined by their knowledge stocks, which evolve over time due to own R&D investments and potentially inward spillovers. It is shown that, if absorptive capacity is constant, the incentive to locate in the cluster decreases with respect to the firm’s knowledge stock. Conversely, if absorptive capacity depends positively on knowledge stock, the firm’s incentive to join the cluster is larger the more knowledge it has. It is also shown that qualitative properties of the equilibrium paths of R&D investments and knowledge stocks differ substantially depending on whether absorptive capacities are constant or knowledge dependent.