The Interaction of Economic Freedom and Entrepreneurship on Economic Growth in Selected Countries

اقتصاد و توسعه منطقه ای

Article 6, Volume 28, Issue 21, October 2021, Pages 139-174   

Document Type: مقالات پژوهشی

DOI: 10.22067/erd.2021.18827.0

Authors

Marjan Zamani¹; Mohsen Mohammadi Khyareh^{* 2}; Reza Mazhari²

¹MA Student of Entrepreneurship Management, Gonbad Kavous University

²Asistant Professor of Economics, Gonbad Kavous University

Abstract

Extended abstract
1- INTRODUCTION
The recent global crisis and the emergence of widespread unemployment and declining economic growth in many economies have increased the importance of self-employment and entrepreneurial activities. in addition, in order to alleviate the government's responsibility in elimination of unemployment and developing entrepreneurship, various measures and policies have been considered to ensure the success of entrepreneurs, the most important of which is to establish an appropriate institutional framework to ensure the success of entrepreneurs. when formulating institutional policies support entrepreneurship then entrepreneurship can play an important role in national economic growth and development (Bjørnskov & Foss, 2013; Baumol & Strom, 2007; Levie et al., 2014). it should be noted, that in order for entrepreneurial activity to lead to economic growth, entrepreneurs must operate freely without worrying about government or others violating private property rights. entrepreneurs in a free market react to market incentives and price signals, and this leads to an efficient market trend. thus, just as countries provide more economic freedom by protecting private property, reducing regulations and taxes, and limiting rent-seeking opportunities. this leads to better institutional quality, which in turn promotes productive entrepreneurship and enhances economic growth and development (Gwartney & Lawson, 2009; Wiseman & Young; 2013). in fact, it can be concluded that the decision for entrepreneurial activity depends to some extent on whether the institutions support economic freedom or not. in other words, where there is no rigid government control, the conditions are right for an entrepreneurial business culture to emerge. however, this is not the case in many economies because the institutions that are supposed to promote entrepreneurial activities, on the contrary, restrict entrepreneurial activities. therefore, the main purpose of this study is to investigate the impact of economic freedom and entrepreneurial activities on economic growth in selected developing and developed countries.
2- THEORETICAL FRAMEWORK
The importance of the role of institutions in the relationship between entrepreneurship and economic growth has been studied in many studies (Acs et al., 2018; Bjørnskov & Foss, 2016). The findings of these studies indicate that the quality of institutions is a factor in encouraging productive entrepreneurship and a barrier to unproductive entrepreneurship; this, in turn, leads to higher economic growth. Market-supporting institutions (such as economic freedom and competitiveness) lead to higher rates of entrepreneurial activity, and increased entrepreneurial activity leads to greater economic growth (Urbano & Alvarez, 2014). Furthermore, the results of the research indicate that some of these differences are due to the diversity of types of entrepreneurships, the characteristics of the macroeconomic environment or the different institutional conditions in which entrepreneurs operate. On the one hand, in an economy with higher levels of institutional quality, the rate of entrepreneurship as one of the main factors increases economic growth. But on the other hand, in economies with low institutional quality, unproductive entrepreneurial activities take shape. That will have little or no negative impact on economic growth. Therefore, this insight can be used to understand and explain why entrepreneurial activities in some countries have strengthened economic growth but in some other countries have not encouraged economic growth.
3- METHODOLOGY
The purpose of this study is to investigate the interaction between entrepreneurial activities and indicators of economic freedom on economic growth in selected developing countries for the period 2010-2018. the statistical population consists of 33 developed countries and 33 developing countries. the selection of countries is based on the availability of data.
One of the main challenges in the empirical test of the impact of institutions on economic growth is the endogenous nature of institutional variables. one of the suitable econometric methods to solve or reduce the problem of endogeniety of institutional indicators and correlations between institutional variables and other explanatory variables is model estimation using gmm approach of dynamic panel data. therefore, in the present study, GMM modeling has been used to examine the relationship between entrepreneurship, economic freedom and economic growth.
4- RESULTS & DISCUSSION
The results generally indicate that the interaction between entrepreneurship and indicators of total economic freedom, rule of law, efficiency of laws and regulations and open markets on economic growth in both groups of selected countries has been positive and significant. also, the interaction between government size and entrepreneurship in developed countries has been positive and significant, but has not been significant in developing countries. also, according to the model results, economic freedom in developing countries has had a greater impact on economic growth, but this effect has been weaker in the group of developed countries. because in developing countries with less economic freedom and more unemployment potential, improving freedom indicators will increase people's motivation for entrepreneurial activities and thus higher economic growth. in addition, the results indicate that the impact of entrepreneurship on economic growth has been positive in developed countries and negative in developing countries.
 
5- CONCLUSIONS & SUGGESTIONS
In this study, the interaction effect of economic freedom entrepreneurship on economic growth in two selected groups of developing and developed countries was investigated. according to results, the following suggestions are presented:
Government policy should be taken to improve the index of economic freedom by enacting appropriate laws to facilitate investment, encourage foreign direct investment, remove restrictions on access to foreign currency, reduce tariffs appropriately, and remove non-tariff barriers.
Given the different impact of entrepreneurial activities in the two groups of countries under study, in expressing the belief that entrepreneurship always encourages economic growth, the aspect of caution should be considered. in fact, since most of the entrepreneurial activities in developing countries are of the necessity type, entrepreneurship has a negative relationship with economic growth in these countries. as a result, policymakers need to promote opportunity-based entrepreneurial activities by implementing policies such as improving institutional quality, providing the right business environment, and increasing the convenience of businesses.

Keywords

Economic Freedom; Rule of Law; Government Size; Regulatory Efficiency; Open Markets

Supplementary Files

chkide 21.pdf

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