The effect of communication and energy services reform on manufacturing firms' innovation

Upstream services liberalization improves the efficiency and cost of communication and energy services, reducing the marginal costs of downstream manufacturing firms through input-output linkages. This study explores one possible mechanism behind this finding: innovation. I investigate the effects of communication and energy services reform in India in the mid-1990s on downstream manufacturing firms' decisions to invest in R&D. The empirical analysis uses manufacturing-firm level data and regulation indicators in the communications and energy service sectors. The liberalization of services in India had a positive effect on manufacturing-firm innovation. These results are concentrated on firms in the middle of the initial productivity distribution. The main channel is the elimination of entry barriers into the communication sector.