Do Economic Freedom and Entrepreneurship Impact Total Factor Productivity?

SMG Working Paper No. 8/2010

43 Pages Posted: 29 Sep 2010

See all articles by Christian Bjørnskov

Christian Bjørnskov

Aarhus University - Department of Economics and Business; Research Institute of Industrial Economics (IFN); Center for Political Studies; Institute for Corruption Studies

Nicolai J. Foss

Copenhagen Business School - Department of Strategy and Innovation

Date Written: September 17, 2010

Abstract

The economics of growth has shown that countries not only grow by deploying higher levels of inputs to production, but also by better allocating whatever resources are at their disposal and by introducing productivity-enhancing innovations. We proffer arguments as to why and how entrepreneurship as well institutions of liberty (i.e., economic freedom, including the rule of law, easy regulations, low taxes and limited government interference in the economy) positively impact total factor productivity (TFP): These institutions allow entrepreneurial experimentation with the combination of factors to take place at low transaction costs. We test these ideas on a unique panel data set derived from Compendia, World Bank data and the Fraser Institute’s economic freedom data. We find that while entrepreneurship positively impacts TFP, the marginal contribution of entrepreneurship to TFP is strongest in economies with substantial government activity.

Keywords: Total factor productivity, freedom variables, self-employment

JEL Classification: O43, O47, O57

Suggested Citation

Bjørnskov, Christian and Foss, Nicolai J., Do Economic Freedom and Entrepreneurship Impact Total Factor Productivity? (September 17, 2010). SMG Working Paper No. 8/2010, Available at SSRN: https://ssrn.com/abstract=1683965 or http://dx.doi.org/10.2139/ssrn.1683965

Christian Bjørnskov (Contact Author)

Aarhus University - Department of Economics and Business ( email )

Fuglesangs Allé 4
Aarhus V, DK-8210
Denmark

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Center for Political Studies

Landgreven 3
Copenhagen K, DK-1301
Denmark

Institute for Corruption Studies

Stevenson Hall 425
Normal, IL 61790-4200
United States

Nicolai J. Foss

Copenhagen Business School - Department of Strategy and Innovation ( email )

Kilen
Frederiksberg, 2000
Denmark

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