Economic freedom and entrepreneurial activity

Abstract

PurposeThe purpose of this paper is to examine empirically whether economic freedom affects entrepreneurial activity in three groups of countries, classified according to economic development.Design/methodology/approachData on the index of entrepreneurial activity cover the period between 2002 and 2009, and are taken from the annual GEM (Global Entrepreneurship Monitor) reports and from theIndex of Economic Freedompublished by The Heritage Foundation from 1995 to 2009. The same analysis is carried out, grouping the countries by development level, following the classification included in theGlobal Competitiveness Report 2009‐2010. A Ridge regression analysis is performed to measure the model's goodness‐of‐fit and to determine equations that can be used for future predictions.FindingsThe results obtained in the correlation analysis show that economic freedom is closely related to entrepreneurial activity. The results suggest that TEA rates, opportunity‐TEA rates and necessity‐TEA rates decrease when there is an increase in economic freedom in a country, as just two of the areas analyzed – i.e. “government size” and “fiscal freedom” – appear to foster the emergence of new entrepreneurs. When countries are grouped by level of economic development, the results for countries belonging to the “Innovation‐Driven Economies” group show that the opportunity‐TEA rates increase as the economic freedom index grows.Originality/valueThe study indicates that entrepreneurship by opportunity increases in the group of Innovation‐Driven Economies with smaller “government size” and more “fiscal freedom”.