The unequal effect of India's industrial liberalization on firms' decision to innovate: Do business conditions matter?

This paper examines the heterogeneous impact of industrial liberalization policy, the dismantling of the "License Raj" in India, on firms' innovation performance. Our results show that larger and more productive firms in liberalized industries were more likely to take up R&D while the smallest and least efficient firms were less likely to do so. We also show that this inequality of effects was strongest in economically less developed Indian states and where financial development and the knowledge base are weaker. This suggests business conditions shape heterogeneous impacts of liberalization policies to the advantage of initially larger and more efficient firms.

Keywords: Industrial liberalization, innovation, R&D, firm heterogeneities, policy impacts, policy complementarities, firms, India

JEL Classification: O25, O31, O14, D22, L2, L6