The role of foreign direct investment and regional absorptive capacity on economic complexity: A Brazilian investigation

Abstract

This study investigates how Foreign Direct Investment (FDI) and regional absorptive capacity (AC) shape economic complexity at the municipal level in Brazil, an emerging economy characterized by structural heterogeneity. Using regional export data and a manually constructed FDI proxy, we apply Feasible Generalized Least Squares (FGLS) and panel threshold regression to examine the relationship between FDI, AC, and the Economic Complexity Index (ECI). The findings demonstrate that both FDI and AC positively influence regional economic complexity; however, the relationship is non-linear. Specifically, FDI enhances economic complexity only in municipalities that surpass a minimum AC threshold, underscoring the conditional nature of the benefits of foreign investment. Robustness checks confirm the reliability of the results despite the relatively limited number of observations. These findings carry important policy implications: attracting FDI alone is insufficient to foster regional productive sophistication without parallel investments in human capital, infrastructure, and innovation capacity. Policymakers should prioritize sectors with existing capabilities and design integrated FDI strategies aligned with local productive structures to support sustainable and diversified economic growth. By providing novel municipal-level evidence from Brazil, this study contributes to the literature by highlighting the critical moderating role of absorptive capacity in the FDI–economic complexity nexus.