We consider a two region growth model with vertical innovations where technical externalities in R&D lead to a technology leading region being the most attractive location for innovative firms. Innovations are produced in the form of quality improvements building on available knowledge and firms choose a technologically advanced location to maximise the productivity of R&D and maintain their niche monopoly. The partial nature of spillovers causes an additional force for agglomeration: the clustering effect. Agglomerated locations have the benefit of local inter-varietal knowledge spillovers for growth while peripheral locations depend on trade and regional knowledge spillovers.