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Abstract:
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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. |
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