Political Federalism and Innovation: Are de jure Labor Regulations Absolute?

Abstract The importance of labour regulation in influencing innovative activity has attracted significant attention in the literature. What has not been adequately explored is the role played by different categories of such laws. In this context, employing state-level data for India during 1992–2010, we investigate how political federalism interacts with labour laws to influence innovative activity. Our findings suggest that although certain labour laws foster innovation, its complementarities with political federalism end up dampening innovation. These results call into question the widely held view of the innovation-enhancing effects of labour laws and suggest that the hitherto unaddressed political channel might have an important role to play in this regard.