Tracing non-linearity in the relationship of economic freedom and national health innovation system efficiency

Economic freedom, the freedom of companies to pursue business activities, is a vital determinant of societal health, wealth, and economic progress. Despite the high societal and economic relevance of health innovation, the relationship between economic freedom and the performance of national health innovation systems (NHIS) is poorly understood. Previous studies show that economic freedom is beneficial for innovation productivity. We acknowledge the benefits of economic freedom, but argue that it also comes with great uncertainty for innovators. Theorizing on the costs and benefits of economic freedom, we suggest that the benefits dominate only up to a certain point, causing an inverted U-shaped relationship between economic freedom and NHIS efficiency. Further, we argue that the volatility of economic freedom flattens this inverted U-shaped relationship, as varying levels of economic freedom require continuous adjustments to the regulatory environment, which ultimately increases uncertainty and the threat of opportunism. Using a panel dataset of 73 countries over ten years, we combine techniques of data envelopment analysis and regression analysis to probe our theorizing. The results support our hypotheses, showing an inverted U-shaped relationship between economic freedom and NHIS efficiency and providing initial evidence on volatility as an associated boundary condition.