Abstract
We study the effects of regional integration on patterns of production and offshoring in a two-region model of occupational choice and endogenous growth. The distribution of asset wealth and allocation of heterogenous workers into innovation and production determines relative market size. When trade costs and knowledge dispersion are high (low), the asset wealthy (poor) region has a larger market and greater shares of innovation and manufacturing. For low to intermediate levels of trade costs, innovation and manufacturing offshoring flows toward the larger region, but when trade costs and knowledge dispersion are high, offshoring flows from the larger asset wealthy region to the smaller asset poor region. Economic growth is unaffected by the shifts in innovation and production that coincide with changes in relative market size.
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