The purpose of this paper is to examine the cross-country variation in innovation and propose that it can be explained by the presence of market institutions using the Global Innovation Index.
This paper uses ordinary least squares with region and OECD fixed effects to test whether more economic freedom is associated with more innovation.
The findings reveal that the effect of market institutions on innovation is promoted by both knowledge and creativity. When innovation is broken down into its component measures, the results suggest that a high-quality legal system is associated with more creativity and free trade is associated with greater knowledge.
These findings provide evidence that economic freedom matters for innovation through both creativity and knowledge, particularly through the protection of property rights and the legal system and free trade. Policy makers desiring to spur innovation may want to examine the level of freedom in private ownership and the reduction of trade barriers as a prerequisite for innovation policy.
