Academic journal article Entrepreneurship: Theory and Practice

Economic Freedom and the Motivation to Engage in Entrepreneurial Action

Academic journal article Entrepreneurship: Theory and Practice

Economic Freedom and the Motivation to Engage in Entrepreneurial Action

Article excerpt

Using institutional theory, the Heritage Foundation/Wall Street Journal 2003 Index of Economic Freedom, and the 2002 Global Entrepreneurship Monitor, we regress opportunity-motivated entrepreneurial activity (OME) and necessity-motivated entrepreneurial activity (NME) on 10 factors of economic freedom and gross domestic product (GDP) per capita for 37 nations. We find that both OME and NME are negatively associated with GDP per capita and positively associated with labor freedom, but that various other factors of economic freedom are uniquely related to either OME or NME. Specifically, we find that OME, but not NME, is positively associated with property rights, while NME, but not OME, is positively associated with fiscal freedom and monetary freedom. Thus, governmental restrictions of economic freedom appear to impact entrepreneurial activity differently depending on the particular freedom restricted by government and the entrepreneur's motive for engaging in entrepreneurial action.

Introduction

Entrepreneurship is integral to economic development (Kilby, 1971; Kirzner, 1997; North, 1990; Schumpeter, 1934) and economic growth (Carree & Thurik, 2003; Holcombe, 2000; Romer, 1986; Wenneker & Thurik, 1999). By discovering opportunities to employ resources in more productive ways (Say, 1819/1834; cited in Drucker, 1985, p. 21; Schumpeter, 1942, p. 132), entrepreneurs help an economy to achieve allocative and adaptive efficiency (DiLorenzo, 2004; North, 2005). Although entrepreneurial action can be the product of decisions made by influential agents in existing organizations (Moran & Ghoshal, 1999; North, 1990), it is more commonly associated with new venture creation (Gartner, 1990). The creation of a new organization, however, is contingent upon the belief that self-employment promises more expected utility than either employment within an existing organization or unemployment (Douglas & Shepherd, 2000; Van Praag & Cramer, 2001).

The entrepreneurial decision to become self-employed is embedded in a matrix of institutions that influences both the motivation and uncertainty one experiences in the decision-making process (North, 2005). This matrix consists of various institutions of economic freedom within a nation (Ali & Crain, 2002; Cole, 2003, p. 196). Gwartney and Lawson (2002, p. 5) define economic freedom as "the degree to which a market economy is in place, where the central components are voluntary exchange, free competition, and protection of persons and property." Even though a number of empirical studies have demonstrated that economic freedom precedes economic growth (Heckelman, 2000) and that a positive relationship exists between economic freedom and gross domestic product (GDP) (e.g., Berggren, 2003; Cole, 2003; Grubel, 1998; Haan & Sturm, 2000; Powell, 2003), such a link has yet to be established between economic freedom and entrepreneurial action (see Stel, Carree, & Thurik, 2005 for a recent exception) despite theoretical presuppositions that a positive correlation exists (e.g., Boaz, 1997; Gilder, 1993; Wenneker & Thurik, 1999).

The purpose of this article is to investigate differences in levels of entrepreneurship among countries by gauging the existence of a relationship between government-related variables and the motivation to become an entrepreneur. By equating increases in economic freedom to reductions in transaction costs, we examine whether there is a relationship between the specific factors of economic freedom and either opportunity-motivated (OME) or necessity-motivated entrepreneurial activity (NME). OME is initiated when individuals perceive a business opportunity (i.e., they elect to start businesses as one of several possible career options). Consequently, the decision to engage in OME is not a forced choice; instead, individuals are "pulled" into entrepreneurship by the attractiveness of the opportunity. NME, on the other hand, is initiated as a last resort (i. …

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