Patented innovation is a predominately local phenomenon. It is also an indicator of economic growth. Using data on U.S. metropolitan statistical areas, we examine the long-run effect of economic freedom, and each of its three components, on local patent activity. Using an instrumental variables approach for identification, we find that increased government spending is associated with reduced individual patent activity, though this effect is modest in magnitude. Our strongest results suggest that increased economic freedom significantly reduces patent concentration in both ownership and product types. This implies that economic freedom creates an environment conducive to diverse and diffused innovation and may provide a viable alternative to place-based economic development strategies. Our results are robust to a quantile regression instrumental variable analysis.
- economic freedom