<mark>local firms to innovate to maintain competitiveness, but also to introduce new ideas, products and business practices which may spill over to local firms via market interactions.</mark>

- **<mark>Extent of government ownership.</mark>** <mark>Ayyagari, Demirguc-Kunt and Maksimovic (2011) examine the effect of government ownership on firm innovation. They find that state ownership (if the state owns 50% or more of the company).</mark>

- **<mark>Enterprise regulations and corruption.</mark>** <mark>Hallward-Driemeier, Khun-Jush and Pritchett (2010) examine the effect of the ‘deals environment’ (the prevailing extent of informal payments, deals, and the impact of uncertainty) on employment growth. To measure the deals environment, they use measures of overall management time with government officials and the size of bribe payments made to ‘get things done’. In our innovation analysis, we proxy for the regulatory environment by including the number of inspections a firm received from the Inland Revenue Department. On a related link between industrial regulation and insufficient product innovation, Goldberg et al. (2010a) argue how the lack of “creative destruction” among multiproduct firms in India over the period 1989-2003 (product churning is substantially lower among Indian than U.S. firms due to the lack of shedding of existing product lines) is due to the legacy of industrial license requirements for establishing and expanding capacity in the manufacturing sector (once the high sunk costs of expanding operations were incurred, firms were reluctant to withdraw established product lines).</mark>

- **<mark>Crime and security.</mark>** <mark>We relate measures of crime and disorder—specifically, the percentage of sales lost due to crime, theft and disorder—to measures of productivity based on the hypothesis that areas with higher levels of crime and conflict may experience lower productivity through a misallocation of either entrepreneurial talent or other resources. In South Asia, conflict- and crime-prone areas also typically have lower infrastructural stocks, higher levels of corruption, worse health outcomes, and a greater incidence of poverty (Ghani 2010, and Ghani and Iyer 2010).</mark>

# **_<mark>(2) Access to skills</mark>_** <mark>.</mark>

- **<mark>Worker training</mark>** <mark>. Studies show that firms' capacity to absorb and benefit from new technology depends on management and worker training (see Bell and Pavitt 1992).</mark>

- **<mark>Education and skills of the top manager/owner.</mark>** <mark>de Mel, McKenzie and Woodruff (2010) show the importance of firm owner characteristics such as ability, motivation and competitive attitudes to risk as a primary drivers of growth, based on a series of surveys of own account workers and owners of enterprises in Sri Lanka. Based on a follow-on representative survey of over 2,800 micro, small and medium privately-owned firms in Sri Lanka in 2008, de Mel, McKenzie and Woodruff (2009) show that owner ability (more educated individuals, higher logical ability), conditioning on firm size and other firm characteristics, has a significant and substantial impact on the likelihood of a firm innovating and higher profitability. We use measures of both education and business training to assess the relationship between education, skills and innovation.</mark>

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