The current issue and full text archive of this journal is available at

[Link]/[Link]

JEPP
2,2
Economic freedom,
entrepreneurial activity, and the
service sector
144 Stephan F. Gohmann
Department of Economics, College of Business, University of Louisville,
Louisville, Kentucky, USA
Bradley K. Hobbs
Florida Gulf Coast University, Fort Myers, Florida, USA, and
Myra J. McCrickard
Bellarmine University, Louisville, Kentucky, USA

Abstract
Purpose – The purpose of this paper is to focus on the impact of economic freedom on entrepreneurial
activity in the service sector. Specifically, the paper examines how economic freedom at the state level affects
employment among North American Industry Classification System (NAICS) six-digit service industries.
Design/methodology/approach – The paper uses a fixed effects model to predict the effect of
economic freedom on employment in each of the NAICS six-digit service industries. The paper uses
the significance of the economic freedom coefficients to determine which industries grow and which
shrink with increases in economic freedom.
Findings – The empirical findings reveal that economic freedom improves job growth for some, but
not for all industries. Employment tends to grow in the six-digit industries that are categorized as
finance and insurance, administrative and waste services, and professional and technical services.
Employment in many of the health care and social assistance industries as well as accommodation and
food services industries tends to fall with increases in economic freedom.
Originality/value – These results give a more detailed assessment of the influence of economic
freedom on employment growth based on micro-level data. The results can be used by policy makers
to better understand how changes in economic freedom influence the portfolio of industries that
develop in their states.
Keywords Employment, Freedom, Rent seeking
Paper type Research paper

1. Introduction
The positive relationship between increased economic freedom and increased
economic prosperity for societies is well established in the empirical literature. The
evidence suggests that institutional frameworks supportive of economic freedom lead
to increased aggregate economic prosperity as measured by gross domestic product
at both state and national levels (Friedman, 1962; Barro, 1991, 1996). There are
also positive effects on job growth, particularly through entrepreneurship (Acs and
Armington, 2006; Friar and Meyer, 2003; Laukkanen, 2000).
Although it is generally found that economic freedom contributes to economic
prosperity at the aggregate level, deconstructing the observed aggregate effects
Journal of Entrepreneurship and and exploring whether all industries exhibit higher levels of growth with increased
Public Policy
Vol. 2 No. 2, 2013
economic freedom may be insightful. This paper investigates the effects of economic
pp. 144-159 freedom on a significant sub-sector of the US economy – service industries. The service
r Emerald Group Publishing Limited
2045-2101
rather than the manufacturing sector is selected for analysis for several reasons.
DOI 10.1108/JEPP-Mar-2012-0015 First, the contribution of the manufacturing sector to economic activity as measured by
the percentage of gross domestic product has progressively declined over time. Economic
Manufacturing dropped from 21 percent of GDP in 1980 to 18 percent in 1990, and to freedom
16 percent in 2000 (real 2005 dollars). By 2008, the manufacturing sector represented
only 13 percent of GDP. On the other hand, service industries have become an
important component of economic activity, representing 66.1 percent of GDP in 2009,
25 percent of all employment, and the majority of growth in employment (Swann,
2009). Although service firms typically hire fewer workers per firm, a significant 145
amount of net new job creation originates from small firms. Second, entrepreneurial
decisions concerning firm location may be more heavily influenced by the institutional
environment in the service sector. Finally, many services are inseparable in production
and consumption and lack the transportability of manufactured goods. This limits
the consumer catchment range of many service industries and further constrains the
location opportunities faced by these entrepreneurs.
The size and type of service industries vary significantly across states. There are
many potential explanations for this observation. One factor that has been little
investigated is economic freedom. Although economic freedom is normally positively
associated with economic growth, it is possible that some industries find increasing
economic freedom threatening to profits and view infringements on economic freedom
by government in a positive manner. For instance, rent-seeking licensing behaviors
have been observed in industries as varied as airlines, banking, cosmetology, cell phone
services, sales and distribution of alcoholic beverages, and taxi cab services. States are
characterized by differing institutional frameworks surrounding businesses and we
posit that these differences will influence the observed service sector portfolio in a
given state. This paper extends the earlier empirical analysis of the service sector by
Gohmann et al. (2008) by using a more detailed North American Industry Classification
System (NAICS) six-digit classification scheme for service industries. This allows
further clarification of the specific industries that respond favorably or unfavorably to
greater economic freedom, suggesting which entrepreneurial activity may be classified
as either productive or unproductive (Baumol, 1990).
We examine the effects of economic freedom on a broad range of service industries
as defined by the NAICS at the six-digit level. We use data from the state-level
economic freedom index constructed by Ashby et al. (2010) to estimate the effects
of economic freedom on employment patterns in service industries within the USA.
We find mixed results for specific industries. In short, service industries differ in
both the magnitude and the direction of response to changing levels of economic
freedom. Our findings imply a more complex relationship between economic freedom
and entrepreneurial activity than empirical studies based on more aggregated data
suggest. Differences in economic freedom affect not only the size but also the types of
service industries that develop within a state. Service industries that profit from
the growth of government may welcome governmental regulations that infringe upon
economic freedom. Consequently, it would be rational for entrepreneurs in these
industries to locate and expand their businesses in states with an institutional
environment conducive to a growing government sector, increased takings, and
additional infringements on free exchange within labor markets in order to best
serve their interests. We argue that these findings are consistent with Baumol’s (1990)
conjecture that productive entrepreneurship and unproductive entrepreneurship can
coexist within an economy.
This paper is divided into five sections. Section 2 includes a literature review which
focusses on entrepreneurship and economic freedom. Our empirical model is presented
JEPP in Section 3. Section 4 contains the results and a discussion of their implications.
2,2 Section 5 ends with a conclusion.

2. Literature review: entrepreneurship and economic freedom

Entrepreneurship
Economic growth depends on the quantity and quality of resources as well as the
146 efficiency with which they are allocated. Entrepreneurial activity directs the allocation
and transformation of resources in value creating endeavors. In serving this role,
entrepreneurship is generally recognized as an important engine of economic growth
(Campbell, 2012; Minniti, 2008; Schumpeter, 1934).
Recently, policy makers hoping to increase growth at the state, local, and national
levels have become interested in promoting entrepreneurial efforts and this policy agenda
has led to a renewed debate about how those efforts can be cultivated (Minniti, 2008).
Researchers have responded by trying to define and measure entrepreneurship,
explain how entrepreneurial decisions are determined, identify the various forms
entrepreneurial activity might take, and understand the factors most important in
affecting entrepreneurial decisions and outcomes over different time periods and locations.
A well-defined description of the exact roles entrepreneurs play in promoting
economic growth has not emerged in the literature. Three influential views on the most
important attributes or talents of an entrepreneur have been developed by Knight
(1921), Schumpeter (1934) and Kirzner (1973). Although this might be problematic
in some instances, our paper examines how institutional arrangements such as
those captured by economic freedom affect the allocation of entrepreneurial talent to
Baumol’s (1990) productive and unproductive activities. As Wiseman and Young (2011)
note, the behavior described in all three views of the entrepreneur would be empirically
identified as entrepreneurial. Additionally, they argue each type of behavior would fit
within Baumol’s schema of productive and unproductive entrepreneurship.
Our analysis examining the impact of economic freedom on entrepreneurial activity
is undertaken within the context of Baumol’s (1990) theoretical work differentiating
between productive and unproductive entrepreneurship. Baumol began with the
Schumpeterian view of the entrepreneur as an innovator who created value by
introducing new goods or production methods, opened new markets, acquired a new
supply source for inputs, or organized an industry in a new way. Baumol suggests that
the supply of entrepreneurial talent is allocated to particular activities in response to
perceived profit opportunities available to maximize the welfare of the entrepreneur.
However, he proposed that not all entrepreneurial activity is beneficial to society and
extended Schumpeter’s theory by distinguishing between productive, unproductive,
and destructive activities.
The traditional focus of economists has been on productive forms of
entrepreneurship defined by innovation, discovery, and arbitrage within competitive
market frameworks. This leads to increased value and efficiency within an economy.
In contrast, unproductive and destructive forms of entrepreneurship give rise to
rent-seeking behaviors such as lobbying for subsidies, barriers to entry, special tax
treatment, and price regulation. Baumol (1990) notes:
Thus clear guidance for policy is provided by the main hypothesis [y] that the rules of the
game that specify the relative payoffs to different entrepreneurial activities play a key role in
determining whether entrepreneurship will be allocated in productive or unproductive
directions and this can significantly affect the vigor of the economy’s productivity growth
(p. 918).
Occupational choice models developed by Lucas (1978) and Murphy et al. (1991) have Economic
been used to analyze the allocation of entrepreneurial talent. Lucas suggests that freedom
managerial talent determines the size and distribution of firms in an economy and the
most able managers direct the largest firms, have the most employees, and earn
the highest profits. Murphy, Shleifer, and Vishny extend Lucas’ model by formally
including rent seeking as an option to entrepreneurial activity. Entrepreneurs will
choose the option with the higher relative rate of return and the growth rate of an 147
economy will be determined by the ablest entrepreneur in the productive sector. If rent
seeking is more profitable than productive behavior, the consequence will be that
the ablest managers in the economy engage in unproductive rather than productive
pursuits leading to a decline in both the level of income and its growth rate. Following
Lucas, these unproductive entrepreneurs will have the largest firms. Furthermore,
these decisions may be self-sustaining and imply even more rent seeking relative to
productive activity in the future. As Murphy, Shleifer, and Vishny note, this is true
because future growth is necessary for profitable innovation. As entrepreneurial talent
is diverted to unproductive enterprises, growth slows, reducing even further the
relative return to productive activity. Thus, the relative rates of return to productive vs
unproductive effort and the institutions within which these reward structures are
created is crucial for an economy. These are the conditions from which both the level
and the type of entrepreneurship evolve.

Economic freedom
Wennekers and Thurik (1999) emphasize the primary role of entrepreneurs in “linking
the institutions at the micro level to the economic outcome at the macro level.”
If, as Baumol (1990) suggests, institutions structure the incentives available to the
entrepreneur and are ultimately responsible for the allocation of entrepreneurial talent,
it is important to understand the role institutions play in shaping entrepreneurial behavior.
North (1990) suggests that the institutional environment encompasses economic,
political, and social factors. These elements shape “the formal and informal rules
of the game, place constraints on human action, and possibly reduce uncertainty”
(Minniti, 2008). Institutional environments conducive to productive entrepreneurial
activity and economic growth provide incentives for efficient production and resource
allocation by reducing production and transaction costs.
Recently, several indices have been developed in an effort to measure the institutional
elements associated with economic freedom and most conducive to productive
entrepreneurial activity. Sobel’s (2008) empirical investigation of Baumol’s theoretical
work suggests a link between economic freedom and productive entrepreneurship in
conjunction with a decline in economic freedom and unproductive entrepreneurship.
Specifically, Sobel finds that a system characterized by secure property rights, a fair
judicial system, contract enforcement, and limits on wealth transfers through taxation
and regulation increases the relative returns to productive entrepreneurship
and promotes growth. Other studies corroborate these results and find higher rates of
entrepreneurship and economic growth in states with greater economic freedom
(Campbell and Rogers, 2007; Kreft and Sobel, 2005).
Compared with manufacturing, service industries are rapidly growing in both
output and employment, yet very few studies have examined the impact of economic
freedom on entrepreneurial activity on the service sector. Entrepreneurs engaged
in producing both goods and services respond to incentives when allocating their
talent among productive and unproductive forms of entrepreneurship.
JEPP A cursory look at the data among the states indicates significant differences in
2,2 aggregate rates of growth in service establishments, sales, employment, and payroll.
Table I shows the percentage change in these values from 2002 to 2007 based on the
Economic Census of the Unites States. Missouri experienced the greatest growth in the
number of establishments at 27.7 percent while Alabama experienced a decrease of 3.8
percent. Arizona experienced the greatest growth in sales, employment, and payroll.
148 The percentage change in these variables differs dramatically from the top five ranked
to the bottom five ranked states. While we expect the service sector employment to be
positively impacted by increasing economic freedom in general, what is true in the
aggregate may differ within particular industries. For example, if the accounting
industry benefits from a tax system that is complex and burdensome, firms may be
drawn to states that have complicated tax structures and higher taxes. Thus, the effect
of economic freedom on the growth of a particular service industry is likely to vary.
In short, it is rational for entrepreneurs to engage in “unproductive” entrepreneurship
if it yields higher relative returns. It is naı̈ve to assume that the goal of all individual
industries is to exclusively seek broad-based economic efficiency, value creation, and
societal wealth. The empirical analysis that follows supports this proposition.

3. Empirical analysis
The number of workers employed in an industry is used as a proxy for entrepreneurial
activity in our empirical model. The model is estimated for each six-digit service
industry NAICS code for the years 1990-2009. The equation in log form is:
Y ijt ¼ f ðeconomic freedom; control variablesÞ

where Yijt represents the natural log of the level of employment per working age
population in state i, industry j, in year t.
Data for employment is annual data from the Census of Employment and Wages.
The Census of Employment and Wages Program is a joint program involving the
Bureau of Labor Statistics, the Department of Labor, and the State Employment
Security Agencies. The data set includes employment and wages for workers covered
by state unemployment insurance laws. We use the data aggregated to annual levels
for each state for the six-digit NAICS industry level. These data are available at the
Bureau of Labor Statistics web site ([Link]/cew/).
This analysis uses the Fraser Institute’s Economic Freedom of North America index
published by Ashby et al. (2010). Although the index covers the 50 states plus all ten
provinces in Canada, our analysis covers only the USA and excludes Washington, DC.
We use the “all-government” measure of economic freedom, a combined index
capturing the total effects of government at the federal, state, and local levels. The
index can assume a numerical value between 0 and 10, with ten indicating the highest
level of economic freedom. The “all-government” economic freedom index is based
upon ten variables in three distinct areas: size of government; takings and
discriminatory taxation; and labor market freedom at the combined federal, state, and
local levels of government. The size of government index is designed to capture the
overall influence of government within each state or province as measured by general
government consumption expenditures measured as a percent of GDP, transfers and
subsidies as a percent of GDP, and social security payments as a percent of GDP. The
takings and discriminatory taxation portion of the overall index includes: total
government revenues as a percent of GDP, the top marginal tax rate and the income
Rank State Establishments 2007 % change State Sales 2007 % change State Employment 2007 % change State Payroll 2007 % change

1 MO 85,814 27.7 AZ 99,261,984 73.8 AZ 1,358,344 46.0 AZ 50,948,995 93.3

2 UT 40,819 26.2 VA 185,502,427 59.2 NA 779,071 28.4 NV 28,006,342 55.0
3 ID 24,592 24.2 NV 71,227,980 54.5 FL 4,736,012 20.2 UT 19,069,933 51.2
4 NV 40,175 24.2 UT 37,192,999 48.5 UT 567,706 20.0 FL 171,449,397 45.7
5 AZ 87,390 23.4 NC 130,341,852 47.1 NC 1,857,072 17.6 MD 62,329,626 42.1
46 OH 153,992 4.0 RI 12,948,918 3.2 NH 221,156 19.1 NJ 8,134,541 8.9
47 MI 132,636 3.6 IA 28,155,072 6.9 ND 108,834 20.6 NM 2,876,030 10.9
48 WV 21,369 3.5 ND 6,125,017 7.9 MT 135,307 20.7 NY 3,287,181 12.5
49 MA 106,165 3.4 NH 14,701,572 8.3 WV 219,585 24.3 AK 5,781,851 14.0
50 AL 47,853 3.8 KS 26,994,495 10.3 SD 115,975 27.1 HI 3,078,658 22.0
Source: US Census Bureau, EC0700CCOMP1 All sectors: Core Business Statistics Series: Comparative Statistics for the United States and the States (2002
NAICS Basis): 2007 and 2002 Economic Census [Link] ¼ ECN_2007_US_00CCOMP1
&prodType ¼ table

changes in establishments,
sales, employment, and
freedom
Economic

payroll from 2002 to 2007

149

Table I.
Rankings of percent
JEPP threshold to which it is applied, indirect tax revenues as a percent of GDP, and sales
2,2 taxes collected as a percent of GDP. The labor market freedom index measures: annual
income of minimum wage relative to per capita GDP, government employment as a
percentage of total state employment, and union density as measured by the percent of
unionized workers.
Control variables typically used in the empirical literature on firm location decisions
150 often include labor force quality, taxes, and measures of infrastructure as a proxy for
market access (Papke, 1991; Goetz, 1997; Guimaraes et al., 2000, 2003; Wasylenko, 1997;
Herzog and Schlottmann, 1991). The level of education (percentage of population with a
bachelor’s degree) is important because human capital affects labor force quality and
economic growth (Lucas, 1993; Romer, 1986). The literature suggests a positive
relationship between firm formation activity and higher levels of formal education and
human capital (Acs and Armington, 2004; Kirchhoff et al., 2007). We include the
percentage of the population with a high school degree and also the percentage with a
bachelor’s degree as measures of formal education. Freel (2006) finds that knowledge
intensive firms, often classified as service firms, have relatively high rates of
innovation so we include the number of patents per 100,000 in the population to proxy
the effects of innovation on service firms. Population density can be important for
service firms since higher density areas mean less travel time for customers to reach
their service provider.
Within the USA, transportation infrastructure has a significant effect on the costs
associated with shipping products and these costs play an important role in
manufacturing location decisions. However, transportation infrastructure also affects
both employee and customer transactions costs for service firms. When inseparability
between production and consumption exists, transactions costs become a component
of price. Ihlanfeldt and Raper (1990) find the office location decisions are impacted by
the distance between both the firm and its support services as well as the distance to
customers. We include roadway miles per square mile in our empirical model to
measure transportation infrastructure.
Empirical studies of manufacturing location decisions include subsidies, favorable
tax treatment, and the existence of enterprise zones as control variables. However,
service firms are less likely to receive these types of preferential treatments because
they are smaller and represent a smaller potential tax base (Rubin and Wilder, 1989).
Service firms are also less likely to locate in state-sponsored enterprise zones. Nearly 75
percent of the firms locating in these zones were in manufacturing (Erickson and
Friedman, 1990; Peters and Fisher, 2002).
The empirical model we estimate includes the percent of population over 25 with high
school and bachelor’s degrees, the number of patents per 10,000 population, population
per square mile and highway miles per square mile as independent variables. Taxes
are not included since they are incorporated in the tax freedom component of the
economic freedom index. Annual data on population, education, and patents were
obtained for each state from the Statistical Abstract of the United States. The data
on highway mileage comes from the Department of Transportation (Federal Highway
Administration, various years). A fixed-effects model with year dummy variables
is employed in the estimation procedure since we use cross-sectional time-series data.
To examine the sensitivity of the economic freedom index coefficients to the
inclusion of the independent variables, we estimated regressions which separately
excluded the all of the other independent variables. We found little change in the
empirical results.
 The period of analysis is from 1990 to 2009 for 347 distinct NAICS six-digit level Economic
service industries. The sample size varies by industry from 103 to 1,000. The means for freedom
the independent variables for one observation per year at the state-level are shown
in Table II.

4. Results
The effects of economic freedom on the level of employment in specific service 151
industries defined at the six-digit NAICS industry level are examined in our empirical
analysis[1]. Table III summarizes the overall results of this analysis by presenting the
percent of employment in each service industry (based on a two-digit industry level)
with significant negative and positive coefficients on the economic freedom variable.
Out of the 11 two-digit industry classifications listed, the first six have a greater
percentage of employment in their six-digit sub-classification with positive vs negative
coefficients, that is, employment in these industries grows in response to greater
economic freedom, while the last five categories have a greater percentage of
employment in industries with negative vs positive coefficients. For these industries,
employment contracts as economic freedom grows. Industry classifications where
more than 50 percent of employment in the sub-classification responds positively to
greater economic freedom include management of companies and enterprises (92.6
percent), finance and insurance (66.1 percent), administrative and waste services
(60.0 percent) and professional and technical services (59.0 percent). Although the
information industry classification has more significantly positive (22.4 percent) than
significantly negative (10.3 percent) employment responses to greater economic
freedom, most of the employment responses in this category are insignificant

Variables Mean SD Minimum Maximum

Percent of population with high school degree 83.93 5.23 64.30 93.00
Percent of population with bachelor’s degree 24.32 5.23 11.40 40.40
Highway miles per square mile 3.80 2.54 0.04 13.16
Patents per 10,000 population 2.34 1.79 0.35 13.64 Table II.
Population per square mile 180.81 246.39 0.97 1,180.48 Means for the
All government economic freedom index 6.84 0.37 5.20 8.50 independent variables

Employment
Negative (%) Positive (%)

NAICS 51 information 10.3 22.4

NAICS 52 finance and insurance 15.9 66.1
NAICS 53 real estate and rental and leasing 27.1 38.6
NAICS 54 professional and technical services 16.1 59.0
NAICS 55 management of companies and enterprises 6.1 92.6
NAICS 56 administrative and waste services 20.0 60.0 Table III.
NAICS 61 educational services 33.6 7.8 Percent of two-digit
NAICS 62 health care and social assistance 79.3 6.9 industry employment
NAICS 71 arts, entertainment, and recreation 22.5 6.3 with significant negative
NAICS 72 accommodation and food services 72.4 6.1 and positive economic
NAICS 81 other services, except public administration 13.7 5.0 freedom coefficients
JEPP (67.3 percent). The employment response in the real estate/rental/leasing category is
2,2 primarily positive (38.6 percent), but employment contractions occur for 27.1 percent
of this industry classification and insignificant changes in employment account for
34.3 percent of this category.
Industry classifications where more than 50 percent of employment contracts as
economic freedom grows includes health care and social assistance (79.3 percent) and
152 accommodation and food services (72.4 percent). Although significant employment
reductions outweigh significant employment gains in the educational services, arts/
entertainment/recreation, and other services, except public administration categories,
most of the employment response is insignificant (58.6, 71.2, and 81.3 percent,
respectively).
These findings support earlier work by Baumol (1990) and Murphy et al. (1991)
who suggest that both the level of employment and type of entrepreneurial activity
will be influenced by the institutional environment. Industries that experience
growing employment with greater economic freedom reap the benefits of higher
relative returns to productive rather than unproductive entrepreneurial endeavors.
Consequently these types of industries will benefit from an institutional environment
that encourages productive entrepreneurship such as those elements measured in the
economic freedom index. Specifically, an environment characterized by relatively low
taxation, minimal government size, and minimal government intervention in labor
markets would be conducive to growth in those industries. Alternatively, industries in
which employment contracts with greater economic freedom reap the benefits of
higher relative returns to unproductive entrepreneurial behavior. These types of
industries will benefit from an institutional environment that encourages unproductive
entrepreneurial activities such as rent seeking. Large government, high taxation, and
fewer labor market freedoms would characterize such an institutional environment.

5. Conclusions
Our analysis suggests that the impact of greater economic freedom on entrepreneurial
activity is not consistently positive as aggregate level studies suggest, rather, it varies
dramatically by industry within the service sector. Some industries thrive while
others decline as with in environments with more economic freedom. This implies that
particular service industries will differ on the extent to which they welcome government
intervention in markets.
Although expanding economic freedom is typically associated with entrepreneurial
growth at the aggregate level, economic freedom is likely to be viewed as a mixed
blessing by industries in the service sector. Our empirical results suggest that there
are a number of industries that experience reductions in employment following
growth in economic freedom. This implies that a large subset of service industries
have incentives to adopt unproductive or destructive entrepreneurial behaviors. For
example, it is not surprising that we find that the health care industry grows when
economic freedom declines since many health care services are funded through
government programs such as Medicaid and Medicare.
The strong positive impact of economic freedom on employment in management
of companies and enterprise industries relative to the strong negative effect in
accommodation and health industries is important to policy makers. The average
weekly wage from the CEW data in the management of companies and enterprises
industries is 2.6 times greater than the weekly wage in the health care and social
assistance industries and 3.1 times higher than the wage in the accommodation and
food services industries. Thus the entrepreneurial activity and portfolio of firms Economic
that states attract through their institutional environment determine the earnings of freedom
workers in that state as well as the types of services available to the residents.
Path dependence may also be a problem, especially for many states with low-
economic freedom as these states may have difficulty moving away from policies
that attract rent seeking firms. This implication is consistent with Murphy Shleifer and
Vishny’s theoretical conclusion that a reduction in economic freedom reflects an altered 153
institutional environment in which the relative returns to productive activity are
permanently reduced. Consequently, the future type of industries that entrepreneurs
pursue will reflect the new incentive structure. Our analysis identifies those service
industries offering the highest returns to unproductive behavior.
Note
1. Tables AI and AII in the Appendix report the detailed results of the regressions. The
regressions with significant negative (Table AI) and positive (Table AII) economic freedom
coefficients are listed in order of descending magnitude. A negative (positive) coefficient
indicates that industry employment contracts (expands) in response to greater economic
freedom. Estimated coefficients for the other independent variables are excluded from the
tables due to space limitations (available upon request).

References
Acs, Z.J. and Armington, C. (2004), “The impact of geographic differences in human capital on
service firm formation rates”, Journal of Urban Economics, Vol. 56 No. 2, pp. 244-278.
Acs, Z.J. and Armington, C. (2006), Entrepreneurship, Geography, and American Economic
Growth, Cambridge University Press, Cambridge.
Ashby, N.J., Karabegović, A., McMahon, F. and Bueno, A. (2010), Economic Freedom of North
America 2010, Fraser Institute, Vancouver, BC.
Barro, R.J. (1991), “Economic growth in a cross section of countries”, The Quarterly Journal of
Economics, Vol. 106 No. 2, pp. 407-443.
Barro, R.J. (1996), “Democracy and growth”, Journal of Economic Growth, Vol. 1 No. 2, pp. 1-27.
Baumol, W.J. (1990), “Entrepreneurship: productive, unproductive, and destructive”, Journal of
Political Economy, Vol. 98 No. 5, pp. 893-921.
Campbell, N. (2012), “Entrepreneurial action and the rules of the game: an editorial to introduce
the journal of entrepreneurship & public policy”, Journal of Entrepreneurship and Public
Policy, Vol. 1 No. 1, pp. 4-11.
Campbell, N.D. and Rogers, T. (2007), “Economic freedom and net business formation”, Cato
Journal, Vol. 27 No. 23, pp. 23-36.
Erickson, R.A. and Friedman, S.W. (1990), “Enterprise zones: 1. Investment and job creation of
state government programs in the United States of America”, Environment and Planning
C: Government and Policy, Vol. 8 No. 3, pp. 251-267.
Federal Highway Administration (various years), Highway Statistics, US Department of
Transportation, Washington, DC.
Freel, M. (2006), “Patterns of technological innovation in knowledge-intensive business services”,
Industry and Innovation, Vol. 13 No. 3, pp. 335-358.
Friar, J.H. and Meyer, M.H. (2003), “Entrepreneurship and start-ups in the Boston region: factors
differentiating high-growth ventures from micro-ventures”, Small Business Economics,
Vol. 21 No. 2, pp. 145-152.
Friedman, M. (1962), Capitalism and Freedom, University of Chicago Press, Chicago, IL.
JEPP Goetz, S.J. (1997), “State-and county-level determinants of food manufacturing establishment
growth: 1987-93”, American Journal of Agricultural Economics, Vol. 79 No. 3, pp. 838-850.
2,2
Gohmann, S.F., Hobbs, B.K. and Mccrickard, M.J. (2008), “Economic freedom and service industry
growth in the United States”, Entrepreneurship Theory and Practice, Vol. 32 No. 5, pp. 855-874.
Guimaraes, P., Figueiredo, O. and Woodward, D. (2000), “Agglomeration and the location of foreign
direct investment in Portugal”, Journal of Urban Economics, Vol. 47 No. 1, pp. 115-135.
154 Guimaraes, P., Figueiredo, O. and Woodward, D. (2003), “A tractable approach to the firm location
decision problem”, Review of Economics and Statistics, Vol. 85 No. 1, pp. 201-204.
Herzog, H.W. Jr and Schlottmann, A.M. (Eds) (1991), Industry Location and Public Policy,
University of Tennessee Press, Knoxville, TN.
Ihlanfeldt, K.R. and Raper, M.D. (1990), “The intrametropolitan location of new office firms”,
Land Economics, Vol. 66 No. 2, pp. 182-198.
Kirchhoff, B.A., Newbert, S.L., Hasan, I. and Armington, C. (2007), “The influence of university
R & D expenditures on new business formations and employment growth”,
Entrepreneurship Theory and Practice, Vol. 31 No. 4, pp. 543-559.
Kirzner, I.M. (1973), Competition and Entrepreneurship, University of Chicago Press, Chicago, IL.
Knight, F.H. (1921), Risk, Uncertainty, and Profit, Hart, Schaffnet & Marx [M], Houghton Mifflin
Company, Boston, MA.
Kreft, S.F. and Sobel, R.S. (2005), “Public policy, entrepreneurship, and economic freedom”, Cato
Journal, Vol. 25 No. 3, pp. 595-616.
Laukkanen, M. (2000), “Exploring alternative approaches in high-level entrepreneurship
education: creating micromechanisms for endogenous regional growth”, Entrepreneurship
& Regional Development, Vol. 12 No. 1, pp. 25-47.
Lucas, R. (1978), “On the size distribution of business firms”, Bell Journal of Economics, Vol. 9
No. 2, pp. 508-523.
Lucas, R.E. Jr (1993), “Making a miracle”, Econometrica, Vol. 61 No. 2, pp. 251-272.
Minniti, M. (2008), “The role of government policy on entrepreneurial activity: productive,
unproductive, or destructive?”, Entrepreneurship Theory and Practice, Vol. 32 No. 5,
pp. 779-790.
Murphy, K.M., Shleifer, A. and Vishny, R.W. (1991), “The allocation of talent: implications for
growth”, The Quarterly Journal of Economics, Vol. 106 No. 2, pp. 503-530.
North, D.C. (1990), Institutions, Institutional Change and Economic Performance, Cambridge
University Press, Cambridge.
Papke, L. (1991), “Interstate business tax differential and new firm location”, Journal of Public
Economics, Vol. 45 No. 1, pp. 47-68.
Peters, A.H. and Fisher, P.S. (2002), State Enterprise Zone Programs: Have They Worked?,
W.E. Upjohn Inst, Kalamazoo, MI.
Romer, P.M. (1986), “Increasing returns and long-run growth”, The Journal of Political Economy,
Vol. 94 No. 5, pp. 1002-1037.
Rubin, B.M. and Wilder, M.G. (1989), “Urban enterprise zones: employment impacts and fiscal
incentives”, Journal of the American Planning Association, Vol. 55 No. 4, pp. 418-431.
Schumpeter, J.A. (1934), The Theory of Economic Development (Trans by Redvers Opie), Harvard
University Press, Cambridge, MA.
Sobel, R. (2008), “Testing Baumol: institutional quality and the productivity of entrepreneurship”,
Journal of Business Venturing, Vol. 23 No. 6, pp. 641-655.
Swann, C. (2009), “GDP and the economy advance estimates for the second quarter of 2009”,
Survey of Current Business, August, 2012.
Wasylenko, M. (1997), “Taxation and economic development: the state of the economic Economic
literature”, New England Economic Review, Vol. 25, March/April, pp. 37-52.
freedom
Wennekers, S. and Thurik, R. (1999), “Linking entrepreneurship and economic growth”, Small
Business Economics, Vol. 13 No. 1, pp. 27-56.
Wiseman, T. and Young, A.T. (2011), “Economic freedom, entrepreneurship, & income levels:
some US state-level empirics”, March 1, SSRN, available at: [Link]
abstract ¼ 1817846; [Link] 155
Appendix

NAICS 512210 record production 0.932*

NAICS 512220 integrated record production and distribution 0.725**
NAICS 525910 open-end investment funds 0.631**
NAICS 561311 employment placement agencies 0.505*
NAICS02 516110 internet publishing and broadcasting 0.489**
NAICS 561422 telemarketing and other contact centers 0.484*
NAICS 525110 pension funds 0.478*
NAICS02 525930 real estate investment trusts 0.468**
NAICS 562219 other nonhazardous waste disposal 0.418*
NAICS 512240 sound recording studios 0.416*
NAICS 813311 human rights organizations 0.414*
NAICS 713120 amusement arcades 0.401*
NAICS 561491 repossession services 0.396*
NAICS 611420 computer training 0.389*
NAICS 524114 direct health and medical insurance carriers 0.388*
NAICS 621491 HMO medical centers 0.379**
NAICS 623210 residential mental retardation facilities 0.375*
NAICS 561210 facilities support services 0.346*
NAICS 532411 transportation equipment rental and leasing 0.345**
NAICS 524130 reinsurance carriers 0.344**
NAICS 541490 other specialized design services 0.343*
NAICS 711120 dance companies 0.333**
NAICS 611512 flight training 0.317*
NAICS 624120 services for the elderly and disabled 0.293*
NAICS 519130 internet publishing and web search portals 0.289***
NAICS 541350 building inspection services 0.277*
NAICS 621910 ambulance services 0.274*
NAICS 541910 marketing research and public opinion polling 0.267*
NAICS 561499 all other business support services 0.266*
NAICS02 517212 cellular and other wireless carriers 0.265*
NAICS 523140 commodity contracts brokerage 0.262***
NAICS 519110 news syndicates 0.258**
NAICS02 561310 employment placement agencies 0.254*
NAICS 532291 home health equipment rental 0.248*
NAICS 621391 offices of podiatrists 0.236*
NAICS 541990 all other professional and technical services 0.233*
NAICS 713920 skiing facilities 0.227*
NAICS 622310 other hospitals 0.226*
NAICS 561431 private mail centers 0.222* Table AI.
NAICS 522390 other credit intermediation activities 0.216** Log employment:
NAICS 711130 musical groups and artists 0.215* industries with negative
NAICS 622210 psychiatric and substance abuse hospitals 0.211* significant coefficients for
the economic freedom
(continued) measure
JEPP NAICS 541890 other services related to advertising 0.202*
2,2 NAICS 621610 home health care services 0.200*
NAICS 812331 linen supply 0.196*
NAICS 562111 solid waste collection 0.195*
NAICS 621399 offices of miscellaneous health practitioners 0.185**
NAICS 541712 other physical and biological research 0.178***
NAICS 812930 parking lots and garages 0.178*
156 NAICS 711510 independent artists, writers, and performers 0.173*
NAICS 813212 voluntary health organizations 0.173*
NAICS 511130 book publishers 0.172*
NAICS 532299 all other consumer goods rental 0.164*
NAICS 712130 zoos and botanical gardens 0.163**
NAICS 812113 nail salons 0.155***
NAICS 531110 lessors of residential buildings 0.153*
NAICS 621340 offices of specialty therapists 0.148*
NAICS 813410 civic and social organizations 0.148*
NAICS 711211 sports teams and clubs 0.144**
NAICS 551112 offices of other holding companies 0.143***
NAICS 532292 recreational goods rental 0.142***
NAICS 722320 caterers 0.132**
NAICS02 517510 cable and other program distribution 0.132**
NAICS 713930 marinas 0.132**
NAICS 623110 nursing care facilities 0.128*
NAICS 522120 savings institutions 0.126**
NAICS 621330 offices of mental health practitioners 0.123**
NAICS 524291 claims adjusting 0.122*
NAICS 611110 elementary and secondary schools 0.117*
NAICS02 541710 Physical, engineering and biological research 0.110**
NAICS 814110 private households 0.104**
NAICS 624221 temporary shelters 0.102*
NAICS 522130 credit unions 0.100*
NAICS 813990 other similar organizations 0.099*
NAICS 541921 photography studios, portrait 0.093*
NAICS 811122 automotive glass replacement shops 0.085**
NAICS 621111 offices of physicians, except mental health 0.080*
NAICS 541940 veterinary services 0.077*
NAICS 811490 other household goods repair and maintenance 0.076**
NAICS 611610 fine arts schools 0.069**
NAICS 713950 bowling centers 0.065*
NAICS 624310 vocational rehabilitation services 0.063**
NAICS 621320 offices of optometrists 0.061*
NAICS 811112 automotive exhaust system repair 0.061**
NAICS 722213 snack and nonalcoholic beverage bars 0.061**
NAICS 622110 general medical and surgical hospitals 0.058*
NAICS 561612 Security guards and patrol services 0.055*
NAICS 532120 truck, trailer, and RV rental and leasing 0.053***
NAICS 712110 museums 0.052***
NAICS 811118 other automotive mechanical and elec. repair 0.044***
NAICS 813910 business associations 0.042**
NAICS 722211 limited-service restaurants 0.032*
NAICS 812210 funeral homes and funeral services 0.029***
NAICS 722110 Full-service restaurants 0.019***
NAICS 621210 offices of dentists 0.011**

Table AI. Note: *,**,***Significant at 1, 5, and 10 percent levels, respectively

NAICS 522210 credit card issuing 1.058*
Economic
NAICS 561611 investigation services 0.844* freedom
NAICS 511199 all other publishers 0.678*
NAICS02 517910 other telecommunications 0.638***
NAICS 512132 drive-in motion picture theaters 0.609*
NAICS02 517310 telecommunications resellers 0.606*
NAICS 722330 mobile food services 0.551* 157
NAICS 524298 all other insurance related activities 0.514*
NAICS 525120 health and welfare funds 0.497*
NAICS 562920 materials recovery facilities 0.451**
NAICS 512110 motion picture and video production 0.417*
NAICS 512191 teleproduction and postproduction services 0.417**
NAICS 524113 direct life insurance carriers 0.412*
NAICS 522220 sales financing 0.346*
NAICS 531390 other activities related to real estate 0.332*
NAICS 541519 other computer related services 0.327*
NAICS 611691 exam preparation and tutoring 0.317*
NAICS 523910 miscellaneous intermediation 0.317*
NAICS 541214 payroll services 0.297*
NAICS 811430 footwear and leather goods repair 0.273*
NAICS 541513 computer facilities management services 0.266**
NAICS 541199 all other legal services 0.259**
NAICS 541420 industrial design services 0.258***
NAICS 611692 automobile driving schools 0.257*
NAICS 532412 other heavy machinery rental and leasing 0.239*
NAICS 611710 educational support services 0.237*
NAICS 721191 bed-and-breakfast inns 0.237*
NAICS 722410 drinking places, alcoholic beverages 0.235*
NAICS 541618 other management consulting services 0.227*
NAICS 524292 third party administration of insurance funds 0.226*
NAICS 541613 marketing consulting services 0.223*
NAICS 812332 industrial launderers 0.215*
NAICS 812921 photofinishing laboratories, except one-hour 0.214*
NAICS 522310 mortgage and nonmortgage loan brokers 0.213**
NAICS 541320 Landscape architectural services 0.213*
NAICS 541191 title abstract and settlement offices 0.212**
NAICS 541820 public relations agencies 0.210*
NAICS 541360 geophysical surveying and mapping services 0.209**
NAICS 711110 theater companies and dinner theaters 0.208**
NAICS 611699 miscellaneous schools and instruction 0.200*
NAICS 541870 advertising material distribution services 0.198***
NAICS 562998 miscellaneous waste management services 0.195***
NAICS 811310 commercial machinery repair and maintenance 0.193*
NAICS 541840 media representatives 0.185**
NAICS 561740 carpet and upholstery cleaning services 0.185*
NAICS 541340 drafting services 0.179**
NAICS 561510 travel agencies 0.176*
NAICS 541611 administrative management consulting services 0.173* Table AII.
NAICS 561920 convention and trade show organizers 0.169** Log employment:
NAICS 531320 offices of real estate appraisers 0.168* industries with positive
NAICS 532490 other machinery rental and leasing 0.166* significant coefficients for
the economic freedom
(continued) measure
JEPP NAICS 522291 consumer lending 0.160**
2,2 NAICS 541612 human resources consulting services 0.156**
NAICS 522110 commercial banking 0.156*
NAICS 561613 armored car services 0.154**
NAICS 541330 engineering services 0.153*
NAICS 722212 cafeterias, grill buffets, and buffets 0.152*
158 NAICS 541219 other accounting services 0.149*
NAICS 621999 miscellaneous ambulatory health care services 0.146***
NAICS 551114 managing offices 0.143**
NAICS 515120 television broadcasting 0.143*
NAICS 541512 computer systems design services 0.140**
NAICS 811412 appliance repair and maintenance 0.138**
NAICS 541370 other surveying and mapping services 0.137*
NAICS 561730 landscaping services 0.136*
NAICS 812111 barber shops 0.131**
NAICS 561320 temporary help services 0.130*
NAICS 812191 diet and weight reducing centers 0.128**
NAICS 541511 custom computer programming services 0.126*
NAICS 541310 architectural services 0.126*
NAICS 541380 testing laboratories 0.124*
NAICS 561439 other business service centers 0.120**
NAICS 561410 document preparation services 0.114***
NAICS 518210 data processing, hosting and related services 0.114***
NAICS 541922 commercial photography 0.113***
NAICS 532230 video tape and disc rental 0.108*
NAICS 524126 direct property and casualty insurers 0.107*
NAICS 623990 other residential care facilities 0.098**
NAICS 561110 office administrative services 0.091***
NAICS 812310 coin-operated laundries and drycleaners 0.088*
NAICS 531120 lessors of nonresidential buildings 0.084*
NAICS 541810 advertising agencies 0.083*
NAICS 512131 motion picture theaters, except drive-ins 0.081*
NAICS 811192 car washes 0.079*
NAICS 624410 child day care services 0.074*
NAICS 811113 automotive transmission repair 0.065*
NAICS 531210 offices of real estate agents and brokers 0.058**
NAICS 561720 janitorial services 0.052*
NAICS 541211 offices of certified public accountants 0.049*
NAICS 524210 insurance agencies and brokerages 0.027**
Table AII. Note: *,**,***Significant at 1, 5, and 10 percent levels, respectively

About the authors

Dr Stephan F. Gohmann is the BB&T Professor of Free Enterprise in the College of Business at
the University of Louisville. His research focusses on the influence of government policies on
entrepreneurship, health and information systems. He has authored numerous papers in these
areas. Dr Stephan F. Gohmann is the corresponding author and can be contacted at:
sfgohm01@[Link]
Professor Bradley K. Hobbs is the BB&T Distinguished Professor of Free Enterprise
at Florida Gulf Coast University Fort Myers, Florida. He is in the Department of
Economics & Finance within the Lutgert College of Business. His research interests are Economic
broad and have included Coasian solutions to property rights conflicts; the connections
between economic freedom, corruption, and economic growth; the philosophical foundations
freedom
of markets, and teaching both finance and economics. He has published numerous papers over
his career.
Dr Myra J. McCrickard is a Professor of Economics in the Department of Economics and
Finance at the Bellarmine University. Her research interests include institutional economics, 159
labor economics, health economics, and economic education.

To purchase reprints of this article please e-mail: reprints@[Link]

Or visit our web site for further details: [Link]/reprints