The Advantages of Association: Know-How Sharing and Innovation Adoption in Four Brazilian Cities

Abstract

This paper investigates the role of social learning in the diffusion of different types of innovation in four urban areas of Brazil. A unique database of small sized firms in 19 economic sectors is used to show evidence that entrepreneurs who are members of trade associations (TAs) tend to adopt and diversify types of innovation more often than entrepreneurs who are not members. This is tested against two rival hypotheses. The first involves controls for human capital. The second controls for policy and institutional factors, and for internal characteristics of the firms. In both cases membership to TAs is significant. This set of results is robust across different specifications and in different subsamples. In addition, the urban areas where firms are located are also significant predictors of innovation adoption, which is consistent with the literature on geographic clusters of firms. Because membership of a TA can be endogenous, an instrumental variable is introduced.