The impact of Foreign Direct Investment on innovation: evidence from municipality data in Brazil

Abstract

Current studies about the impact of foreign direct investment (FDI) on innovation in Brazil neglect the city as a unit of analysis, even though the city is the first geographical instance affected by it. I argue that FDI generates innovation for receiving municipalities because innovation is a positive spillover for the city, constituted by the transfusion of capital between a multinational firm and a local firm. To empirically evaluate the hypothesis that FDI increases innovation in the cities, I employ a twofold methodology: I run a fixed effects model as a benchmark and then a multilevel negative binomial model, both using patent data as a proxy for innovation and the count of transactions registered by the Central Bank to measure FDI. The results consistently demonstrate that FDI has a positive association with innovation at the city level. Other local determinants demonstrate that innovation has a positive correlation with greater absorptive capacity, and more agglomerated and economically diversified cities, but a negative association with the share of manufacturing workers. In this sense, this work demonstrates that on average Brazilian cities benefit from the presence of inflows of internationally-owned enterprises.