THE HETEROGENEOUS CAUSALITY BETWEEN ECONOMIC FREEDOM AND INNOVATION: A PANEL DATA ANALYSIS ACROSS INCOME GROUPS
DOI:
https://doi.org/10.64734/bjef.1-1-02Keywords:
Economic freedom, Innovation, Panel Granger causality, Dumitrescu-Hurlin test, Income heterogeneity, Cross-sectional dependenceAbstract
This study investigates the bidirectional causality between economic freedom and innovation across 116 countries classified by World Bank income thresholds over the period 2013-2025. Employing second-generation panel data techniques that account for cross-sectional dependence, including the Pesaran CD test, CADF/CIPS unit root tests, and Dumitrescu-Hurlin panel Granger causality tests, we uncover striking heterogeneity in causal relationships across income groups. For high-income and upper-middle-income economies, innovation Granger-causes economic freedom, suggesting that technological advancement drives institutional reform and market liberalization. Conversely, for lower-middle-income and low-income economies, economic freedom Granger-causes innovation, indicating that institutional foundations must precede innovation capacity building. These findings carry important policy implications: developed nations should prioritize innovation ecosystems to catalyze further economic liberalization, while developing nations should focus on institutional reforms to enable innovation emergence.
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