Space and technology in catching-up economies: “the city as a laboratory for innovation”

Successful catching-up economies tend to exhibit a set of properties: (i) rapid increases in skilled labor and R&D investment, (ii) industrial structure upgrading from technology adoption toward technology creation sectors, and (iii) spatial concentration on the rise. The paper accounts for them by combining the mechanisms of skill-city complementarity and knowledge spillover in the setting of catching-up economies where ideas are more challenging to find along the growth path. With the diminishing possibility of adopting existing ideas, catching-up economies gradually rely more on creating ideas, which requires efficient knowledge spillover through urban spatial concentration based on ability sorting. We highlight that (i) catching-up economies choose proper city size and structure to benefit from growth effects through fostering innovation and spillovers, and (ii) rents here are not just an economic rent but play a productive role of allocating innovative abilities over space in an incentive-compatible manner. We discuss the policy on urban rents.