Hadi Keshavarz

Innovation is widely recognized as a crucial driver of modern economic and social progress. This research aims to investigate the relationship between economic freedom and its components on innovation. A review of the literature indicates that economic freedom can either positively influence innovation (Arrow effect), negatively impact it (Schumpeter effect), or produce a combination of both effects (Scherer effect). To investigate this issue, two groups of countries—developed and developing—were examined. Econometric panel data analysis was conducted for the period 2011-2022 using two models: one based on the overall index of economic freedom and the other on its components. The research findings indicate a positive and significant relationship between economic freedom and innovation in developed countries. However, a deeper analysis reveals that only the rule of law and government size positively and significantly impact innovation within this group. Regulatory efficiency and market openness did not exhibit significant effects, suggesting a partial confirmation of the Arrow effect. In contrast, economic freedom's impact on innovation in developing countries was found to be negative, though not statistically significant. Among the components, only the rule of law showed a negative and significant relationship, aligning with Schumpeter's theories. Additionally, control variables such as GDP per capita, research and development expenditures, information and communication technology, and corruption levels significantly influenced innovation in both groups of countries.