As innovative firms have considerable competitive advantage, more foreign direct investment (FDI) research has been related to innovation. The primary aim of this study is to explore how intra-regional economies interact with host countries’ innovative performance, and how they are affected by FDI. Azerbaijan, Georgia and Turkey, located in the South Caucasus region, are selected as examples. Numbers of patent applications, R&D expenditure (% of GDP), and intellectual property payments are chosen as factors indicative of innovation. While this research tries to explore whether these three countries, connected by large trades, can act as a clustered group, panel cointegration and panel OLS models are used for analysis. The results show that FDI is an important variable affecting the level of innovation in the panel analysis. Nevertheless, individual relationships with FDI vary, and cointegration analysis shows heterogeneity. That is, foreign direct investment could play a central role in increasing the level of innovation for Azerbaijan and Georgia, but it is not an important determinant of Turkey's economic innovation level. Countries should realize that when their economies are becoming stronger FDI is not a useful tool for escalating innovation, rather they should cluster together in order to leverage innovation.