Foreign Direct Investment, Industry Agglomeration, and Regional Innovation in Brazil

Diverse forms of clusters and agglomeration economies, along with the presence of foreign firms, constitute two primary drivers of knowledge development within a national context. This study investigated the impact of foreign business presence and industry agglomeration on regional innovative performance in Brazil. Using a two-step system Generalized Method of Moments (GMM) and data from four consecutive waves (2001–2003, 2003–2005, 2006–2008, and 2009–2011) of the Survey of Innovation (PINTEC), we examined the dynamic relationship between foreign presence, through foreign direct investment (FDI), and the agglomeration of companies in local productive arrangements (LPAs) on product and process innovation development in 10 Brazilian states. Findings indicated that FDI inflows within a geographic region positively affect product innovation. Nevertheless, only LPAs play a significant role in promoting both product and process innovations. This study underscores the importance of foreign presence and LPAs for policymakers and managers seeking to enhance product and process innovation. While prior industrial policies aimed at innovation development may have yielded inefficient results, the LPA structure has shown promising effects in the modern context of agglomeration economies. The research findings suggested that governments should implement more proactive policies to bolster product and process innovation among LPAs.