This paper examines the role of the external institutional environment captured by effective state-business relations on firm performance. By effective state-business relations, we mean a set of highly institutionalised, responsive and public interactions between the state and the business sector. We find that effective state-business relations have had a discernible positive impact on firm performance in Indian formal manufacturing for the years 2000-01 and 2004-05. We also find internal and external institutional factors are complementary to firm performance - smaller firms, firms in urban areas, older firms and firms in simpler organizational forms benefit more.