the demand for human capital. There are many types of product market reforms. Although it is outside the scope of this paper to go into the details of all instruments, the key ones are noted here.

The principle driving product market reforms is to increase competition in the domestic market, as well as to link markets across domestic and international firms. This not only increases the opportunities for local firms (through the trade route), but also allows them to interact with other firms. In doing so, such firms can learn new technologies and adopt better practices. These could be achieved through: (i) reforming restrictive trade policies that could protect unproductive local firms and restrict the expansion of the more productive firms; (ii) aligning domestic and international standards so that local firms have the incentive to learn new technologies to serve the demands of more sophisticated markets overseas; (iii) strengthening trade logistics to reduce the cost of doing business locally and internationally; (iv) supporting firm-level capacity building through incentives for R&D, as well as improvements in management practices and production processes; and (v) reforming distortionary regulations that create an incentive to remain small e.g. labor regulations for SMEs. These would also enable local firms to access opportunities in international value chains, thereby providing an impetus to improve productivity.<sup>25</sup> The example of an auto part firm from India that became a global supplier in the wake of the liberalization of import tariffs (from 60 to 12 percent in 10-15 years) is instructive. In a recent sectoral study from the World Bank, Saraf (2016) traces the evolution of the automotive sector in South Asia. The Chairman of the leading auto-parts company is reported mentioning: “ _We train workers and lose them to others. But we still train because the ones who stay are crucial for our productivity. Unskilled workers are cheaper, but costs match up when their mistakes are financially accounted for. We cannot afford that type of delay and quality when we need to serve clients in Germany and the US._ ” The channels through which product market reform would help in increasing the uptake of OJT are likely to be two-fold. First, at the market level, it would amplify the number and size of opportunities, and increase the demand for productive activities that would require better human capital to realize the benefits.<sup>26</sup> Firms that do not invest in improving their human capital would

> 25 A useful area for future research would be to test the sensitivity of OJT to various aspects of product market reforms. Some common product market reform areas include: reducing average rates of protection and harmonizing tariff schedules across intermediate and final goods; improving standards and product market regulations; facilitating imports for exporters (for example, through better functioning duty-drawback schemes); and strengthening trade logistics to reduce customs clearance, tax burden and transit times. Many services-related regulations might go beyond the scope of “product-market” reform, for example, e-commerce rules. Depending on the country and the sector context, further analysis would be required to ascertain the appropriate instrument. World Bank work regarding competitiveness in South Asia (Hallward-Driemeier 2007) suggests that an inefficient business environment would lead to low and uncertain returns on investment, dragging down productivity and reducing the incentive to adopt technical improvements on the factory floor. As seen from the literature, this would, in turn, reduce demand for complementary activities such as OJT.

26 It is possible that even when the size of opportunity increases in the light of reforms, firms may choose production processes and technologies that might be capital-intensive — avoiding the need for more investment in human capital. This seems unlikely in developing countries because labor inputs tend to be relatively cheaper. Further, firms that are profit-maximizing entities will not want to under-utilize a cheaper input. Second, training might increase the 27