The Regional Determinants of Innovation in a Developing Economy: Canton-Level Evidence from Ecuador

This paper examines whether cantonal context in Ecuador shapes firms’ decisions to invest in innovation activities. Using cross-classified multilevel logistic models that simultaneously account for sectoral and territorial effects, the analysis isolates the net contribution of geography while controlling for firm-level characteristics. The results indicate that location remains a significant determinant of innovation investment: the cantonal environment explains 10.29% of the residual variance in manufacturing and 7.50% in services. Among the territorial factors considered, local financial depth, the share of the population with higher education, and the presence of cooperatives emerge as robust predictors of firms’ propensity to innovate. By contrast, urban agglomeration and aggregate business R&D effort do not reach statistical significance. These findings suggest that, in a developing economy such as Ecuador, innovation depends less on simple density effects than on territorially embedded capabilities associated with finance, human capital, local institutional coordination, and collective learning dynamics, which more broadly shape firm behavior.