The differential impact of India’s industrial liberalization on firms’ R&D: does import competition matter?

Market competition and production scale jointly shape firms’ innovation incentives. Industrial delicensing in India provides a quasi-natural experiment to examine the influence of market conditions on firms’ R&D. Hence, we investigate the long-term impact of industrial delicensing on firm-level R&D from 1988 to 2020 using a staggered difference-in-differences framework. We further study the heterogeneous effects of import competition in shaping the relationship between industrial delicensing and firm-level innovation. The analysis finds a positive and statistically significant impact of delicensing on firms’ R&D stock. However, the results reveal a varying response based on the degree of import competition, as firms facing high import competition increase R&D spending, whereas those in low import competition industries do not respond in a similar manner. These findings align with theoretical predictions that competitive environments stimulate innovation. The results also reveal heterogeneity in treatment effects across firm size and age.