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Government regulation can have an impact on firm level innovative activities.
In some cases, the impact is clear and obvious. For example, the US government has (and this is probably a good thing) very lengthy procedures that must be followed before a drug can be approved for human use. The fact that firms must jump (at great cost) through all these hoops makes it harder for them to innovate and create new drugs.
In some cases, the impact is less clear. For example, immigration policy is not really about innovation, but it can have an impact. If it is hard for scientists, for example, from foreign countries to be allowed in the US to work, it becomes harder for firms to find employees who can do innovative things.
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