reduction are more likely to increase their innovative capacities. I exclude firms that belong to industries that had the highest benefit from these reforms as a robustness test. The results with sub-samples are presented in Table 6. In the first column I exclude 4-digit industries that had more than half of the industry liberalized in FDI by 1995. In the second column I exclude the top quartile of industries that had the highest drops in output tariff rates between 1989 and 1995. In the third column I exclude top quartile of industries that had the highest drops in input tariffs for the same time period. In all three columns licensing reform significantly increases innovation performances of firms which provide further support that the relationship between licensing reforms and innovation is not affected by these other reforms.

In his survey on technology diffusion, Keller (2004) summarizes theoretical and empirical literature on how imports provide knowledge and technology transfer in a macroeconomic perspective. Using micro-level data from developing countries Almeida and Fernandes (2008) and Seker (2011) provide evidence on importing and exporting firms being more innovative. Criscuolo et al. (2010) reach a similar conclusion on the contribution of exporting on innovation for British firms. In the fourth and fifth columns of Table 6, I exclude export oriented and import oriented industries respectively. The coefficient of licensing reform indicator continues to be significant. Another test with sub-samples is with employee income levels. Industries with high wage payments are likely to employ more skilled workers and produce more knowledge embodied products. This could facilitate the innovation activities in these industries. In the last column I exclude the top quartile of the industries with the highest wage payments.<sup>13</sup> Some of the industries went through multiple reforms and the sub-sample used in each column of the table could include overlapping industries which could affect the results. Although there are industries that have been included in multiple groups, their numbers are not large with a possible exception of industries with highest input and output tariff drops. 50 percent of firms that belong to industries in the top quartile of input tariff drop also exist in industries that are in the top quartile of output tariff drop. The overlap of industries among other groups is much smaller.

In India, there are institutional differences across states on labor regulations. These differences can affect the relationship between licensing reform and innovation. Besley and Burgess (2004) show that pro-worker labor regulations in Indian states resulted in lower output, employment, investment, and productivity in formal manufacturing sector. Following their work, Aghion et al. (2008) find that when licensing reform occurred, industries in states with pro-worker regulations experienced less increase in output and employment relative to pro-employer states. These differences across states can affect firms’ innovative performances. Aghion et al. (2008) use a dataset at industry level obtained from ASI which prevents them from analyzing the dynamics of firm evolution. To see the effects of labor regulations on innovation performances of firms, I include an interaction term between the licensing reform indicator and a dummy variable which is set to one for pro-worker states. The result is presented in the first column of Table 7. In this specification interaction term is treated as endogenous in addition to _Log(Sales)_ and R&D variables. The result is in accordance with that of Aghion et al. (2008) although their dependent variable is log of sales where here it is product growth rate. In pro-worker states, the contribution of licensing reform on firm innovation rates is almost six percent less compared to proemployer states. Regulations that favor worker rights hinder job flows in firms by raising the costs of

> 13 The wage data is from 1987 Annual Survey of Industries database.

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