A Comparative Approach to Explore the Effects of Institutions on Self-Employment and Innovation in Selected Countries

In this paper, we try to explain cross-country differences in the level of entrepreneurship using self-employment and innovation as proxy variables. For this purpose, we use a comparative approach to explore empirically the ways in which institutions have influenced self-employment and innovation. In this paper, we make the assumption that national patent grants represent innovation and that national self-employment rates represent job replacement. Then, we investigate the relationship between the institutional setting, in terms of economic freedom measures, and entrepreneurship which is measured by proxy variables of self-employment and innovation in a panel data setting covering selected countries for the time-period of 1990-2009. The empirical findings show that indices of corruption perception, business freedom and trade freedom are negatively correlated with self-employment rate. On the other hand, investment freedom and freedom from government intervention have positive effect on self-employment. Interestingly, we found that institutional factors that determine self-employment and innovation may act in opposite directions: what encourages self-employment might discourage innovation and vice-versa.