We examine the profitability of different R&D location strategies of firms in a dynamic industry model. Firms engage in imitative and innovative activities in order to improve their products' quality, which determines their competitiveness. When choosing the set of locations in which to operate firms face a fundamental trade-off: co-locating with competitors' generates opportunities to improve product quality through imitation, but at the same time it increases the risk of losing one's competitive edge through outgoing spillovers. Being unable to fully predict competitors' moves, in making location choices firms rely on heuristics based on the expected present values associated with alternative location patterns. In a positive perspective, our model replicates key stylized facts highlighted in the pertinent empirical literature. On normative ground, we identify industry scenarios in which a firm should enter (not enter) a location even if the expected present value of doing so is negative (positive). Our key contribution is to provide a taxonomy of suitable firm location strategies depending on firm type and industry characteristics in a dynamic environment with endogenous cluster formation.
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