Does Higher Labour Market Flexibility Discourage R&D? Firm-level Evidence from India’s Organised Manufacturing

The empirical evidence on the association between labour market flexibility and R&D activities of firms is limited only to developed economies. In this research note, we examine the relationship between labour market flexibility and the R&D decisions of firms in India's organised Manufacturing. Using a cross-section of manufacturing firms from the Annual Survey of Industries 2015-16 unit-level data, we model the R&D decision of firms as a two-step process. We use Cragg’s Double-hurdle model that examines the probability of undertaking R&D in the first stage and the extent of R&D expenditure among the R&D-performing firms in the second stage. Controlling for the firm-specific determinants of R&D expenditure, we find that the spatial variation in labour market flexibility is negatively and significantly associated with the extent of R&D expenditure of R&D-performing Indian firms