This article analyses and compares the determinants of innovationin Argentina and Brazil, countries that have based their industrializationstrategies on import substitution. Probit regressions in which instrumentalvariables are used to check for problems of endogeneity of exports revealthat, in both countries, knowledge external to firms helps to promoteinnovation, that internal research and development capacity is relativelyweak and that external trade integration has a positive effect on firms'propensity to innovate (more so in Brazil than in Argentina);. The results ofthis study suggest in general that there has been modest progress in thepattern of innovation among Argentine and Brazilian firms in recent yearscompared with the import substitution period.