The Economic Freedom Effect on Corporation? Output: The Case of European Union

Cultural norms and institutions are often believed to explain why certain economies grow and other remain poor. It is confirmed that culture and economic institutions, especially economic freedom, play a role in economic behaving and development. Since the time of Adam Smith economists have pointed out that the freedom to choose and supply resources, competition in business, trade with others and secure property rights are elementary factors for economic progress. Economic theory indicates that economic freedom affects incentives, productive effort, and the effectiveness of resource use. As we can see, economic freedom positively affects economic development, but what about the individual entities within the economy (i.e. sectors of economy). Thus, the main aim of this paper is to find out whether economic freedom promotes corporations' output. Two hypotheses are established for this purpose: (1) economic freedom causes corporations' output; (II) economic freedom positively affects corporations' output The paper mentioned three ways to measure and capture economic freedom: indices economic freedom by the Heritage Foundation, the Fraser Institute and ease of doing business by the World Bank Group, The Fraser Institute's index was employed as a proxy variable of economic freedom; the ratio of gross value added of non-financial corporations to gross value added of total economy was applied as corporations' output. Annual data 2002-2012 within EU-27 countries were used. Panel data analysis and Granger causality test were performed to examine effect of economic freedom and causality. The positive relationship between economic freedom and output of corporations as well as the causality from economic freedom to corporations were confirmed.