Tracing Non-linearity between Economic Freedom and National Health Innovation System Efficiency

Abstract

Economic freedom, i.e., the freedom of companies to pursue their business activities, is a vital determinant of societal health, wealth, and economic progress. Despite the high societal and economic relevance, the relationship between economic freedom and the performance of national health innovation systems (NHIS) is poorly understood. While prior studies assume direct linear effects between economic freedom and innovation performance, we argue that economic freedom is only beneficial to a certain extent. We theorize on the costs and benefits of economic freedom and examine potential non-linearity in the relationship between economic freedom and NHIS efficiency. Moreover, we propose a contingency perspective and argue that the relationship between economic freedom and NHIS efficiency is depended on the volatility of the level of economic freedom over time. Varying levels of economic freedom require constant adjustments to the regulatory environment, which ultimately affects the costs and benefits of economic freedom so that under high volatility, the peak NHIS efficiency is lower. Using a panel dataset of 70 countries over ten years, we combine data envelopment analysis and regression analysis. Our results support our theorizing showing an inverted U-shaped relationship between economic freedom and NHIS efficiency and provide initial evidence on the associated boundary conditions.