An empirical analysis of the interactions between economic freedom, management & productivity.

We use cross-sectional data from over 11.000 firms in 34 countries on firm-level management practices, country-level economic freedom and country-level total factor productivity to analyze their interactions and ultimately attempt to answer the following question: “Does the effect of economic freedom on total factor productivity run through management practices?”. Through a variety of linear multiple regression models, we find a significant, positive association between economic freedom and management practices. We also find a significant, positive association between economic freedom and total factor productivity, in which average management practices acts as a partial mediator for two-thirds of the relationship. When we substitute economic freedom for one of its sub-factors, business freedom, we find similar results across the board although with a slightly smaller effect size. However, given the lack of panel data with regards to management practices, we are unable to establish a causal effect. This is a point which future research could improve upon.