Disentangling country-level factors affecting innovation in foreign-owned firms: evidence from Latin American countries

The innovative behaviour of foreign-owned firms has mainly been studied with a focus on the micro-level determinants being less the attention paid to the relevance of capability-building processes in host-countries. Drawing on the national innovation system (NIS) perspective in developing countries, this paper examines the mutually reinforcing relationship between NIS performance – particularly its techno-economic (TE) and socio-political (SP) spheres – and the innovation behaviour of foreign-owned firms, using microdata from eight Latin American innovation surveys covering the period 2010–2016, complemented by country-level indicators. The results indicate that foreign-owned firms are more likely to exhibit higher innovation performance in NIS with a robust interplay between TE capabilities and SP stability, thus providing insights for potential co-evolutionary dynamics between firm-level innovation behaviour and the broader national innovation environment. At a more disaggregated level, the findings reveal that both the socio-political conditions and the science, technology and innovation (STI) framework play a critical role in fostering innovation performance as NIS capabilities evolve. The implication is that institutional environments act as conditional factors for the innovation strategies and performance of foreign-owned firms, offering new insights for the design of policies that take into account the different NIS dimensions affecting this process.