Do local knowledge spillovers matter for development? : an empirical study of Uruguay's software cluster

In economically advanced countries, local knowledge spillovers (LKS) among agglomerated firms are seen as major drivers of regional innovation and growth. In contrast, innovation research focusing on developing countries has emphasized the importance of international linkages, while LKS have remained unstudied. This paper assesses the importance of LKS for the innovation performance of clustered firms in a developing country setting. An econometric analysis with new survey data from software firms in Montevideo, Uruguay, shows that LKS have a significantly positive impact on firms’ innovation performance through labour mobility, company spin-offs and informal interactions among actors. LKS are also shown to be highly important relative to other sources of knowledge used by the firms.