Regional heterogeneity and the effects of the related and unrelated varieties on innovation

Abstract

The aim of this paper is to investigate the effects of related and unrelated variety on innovation considering regional heterogeneity across locations. Previous studies show that in general, related and unrelated variety can affect innovation, but they rarely consider regional heterogeneity across locations. We use the regional knowledge production function with panel data on Brazilian microregions between 2002 and 2017 to analyse the effect of related and unrelated variety on innovation, considering the huge regional heterogeneity in Brazil. Our results show that related variety is associated with both upper‐ and lower‐level innovation, while unrelated variety has stronger effects on upper‐level innovation. Furthermore, the relation between relatedness and innovation is different across Brazilian regions.