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Why has technology in the Forgotten Realms not progressed further than it has at the point when most adventures take place?
Is it because races that live longer tend to be older and hold back progress in favor of tradition?
Is the existence of magic a substitute for technological advancement?
Is there an official answer to this?
If I remember right, Spelljammer (which is essentially Space D&D) overlaps with Forgotten Realms, so there was an outlet for players who wanted some Realms content and some greater technology. But, Spelljammer was 2e, and I don't know that it's been reprinted for the newer systems. Beyond that, if you really wanted some high-magic, high-technology stories when these game settings were first getting published, you had the old Star Wars system and the Palladium universe. If you want that same style of setting now, there's plenty more to choose from. So, it could be an old IP issue or simply that players didn't need to alter the setting to mirror an existing product.
Your second guess is the best explanation. Some of the FR fiction — Drizz't stories in particular, but I sold those books and can't remember which one off the top of my head — features interludes and side characters experimenting with magic-infused early-industrial technology, but it never takes off because the negative effects of getting it wrong far outweigh the positive effects of getting it right. Even if we consider that stuff non-canonical, what elements or effects of an industrial revolution aren't already available in a better form in FR?
"Hey guys, I invented a thing I call an 'engine.' It will drive a cart without a horse, and all it needs is lantern oil!"
"That's cool. We've got a wizard-in-training over here who can summon a phantom steed to pull the cart. He doesn't even need a spell component for that."
There is some sort of official in-game answer, in the Forgotten Realms Adventures (FRA) published right after the update of AD&D onto 2nd edition. On page 11, under the section "New Weapons - Firearms in the Realms", the introduction of smoke-powder (a semi-magical version of gunpowder) weapons by the Lantanese, whose state religion is the worship of Gond, is discussed. These new weapons (arquebus, musket, blunderbuss, etc.) are expensive, can fire only once every 3 or 4 rounds, and are not much better than arrows shot from a longbow in terms of damage dealt. Furthermore, there is a 10-15% chance of backfiring. So you can consider them as rather primitive devices.
In the real world with no magic, one can imagine that there will be incentive to improve those weapons. But on Faerun, who needs to do that? Actually quoting directly from FRA:
Firearm technology has never been extensively (or even adequately) researched and developed, however, save for a few crackpots and eccentric wizards. The reason is simple - who needs firearms in a world with fireballs? (The answer, of course, is people who can't cast fireballs.) No major nation or organization has invested time and money into producing of smoke powder weaponry on a large scale.
So, at least as far as weapon technology goes, the official answer is the second reason you mentioned in your question.
I'm going to challenge the frame: the reasons the Forgotten Realms stays "medieval" are entirely out-of-universe.
You seem to think that the developers approached things in this order:
In reality, it's much more like this:
Forgotten Realms will never progress beyond its high fantasy medieval era because it was specifically created to be a high fantasy medieval setting. Progressing it to the Industrial Revolution, with the associated social changes, would anger all the players who use FR because it's that genre. WotC has a separate setting for people who want a more magitech/steampunk feel for their game: Eberron.
Settings mostly exist to target a specific market niche in terms of genre. Having a setting advance technologically shifts it to a different genre/niche, which leaves its old niche unfilled and brings it into competition with the company's existing products in the new niche. Which is to say, it would be a really stupid thing to do from a business perspective.
You'll probably never find an official in-universe reason for why it doesn't progress beyond the medieval era, just like you wouldn't find an official in-universe reason for why Disney movies contain princesses and bad guys: those are core tropes the entire product (line) is built on, and they're making too much money off of it to go meta and start lampshading those tropes.
