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This piece has been originally posted to Medium.

Did you realize that one of the most important drivers of innovation — and the one that draws surprisingly little attention — was freedom? Yes, freedom.

I came to this conclusion while analyzing specific socio-economic factors affecting innovation. Freedom emerges as a common denominator for the factors that boost innovation. In contrast, restrictions on liberties have a chilling effect on the corporate innovation process.

There are three major levels at which freedom affects innovation: individual, organizational, and national.

Freedom from discrimination

Have you heard about employment nondiscrimination acts (ENDAs)? These are US state-level laws that prohibit discrimination based on sexual orientation and gender identity. A 2016 study showed a significant increase in the number and quality of patents obtained by firms headquartered in US states that have passed ENDAs compared to the states that have not. The result was more pronounced for the states with a large LGBTQ+ population and for firms in human capital-intensive industries, such as technology and finance.

Another study, published in 2018, pointed to a positive effect on the innovation of two social liberalization policies: the legalization of medical marijuana and same-sex marriages. In contrast, the laws imposing additional restrictions on abortion had a negative effect on innovation in the states that adopted such legislation.

No, I’m not saying that people smoking weed or belonging to LGBTQ+ communities are intrinsically more innovative. My point is that innovation implies a certain level of individual freedom, including freedom from being discriminated against for whatever reason.

The labor laws of innovation

Theoretical analysis conducted by Gustavo Manso in 2011 suggests that conditions incentivizing employees to innovate must include tolerance for early failures. This allows corporate innovators to take risks at the initial stages of the innovation process — when the rate of unsuccessful experiments is especially high — without facing negative consequences for failed projects.

Available empirical evidence supports Manso’s conclusion. For example, an analysis of the impact of labor laws on innovation in five countries showed that stronger labor laws positively correlated with a country’s innovation output.

Another study investigated the impact on innovation of the wrongful discharge laws (WDL) in the United States. These laws provide employees with greater protection than employment at will, a common arrangement under which employees can be terminated with or without just cause. The WDL, particularly those that protect employees from termination in bad faith, were found to foster innovation by increasing the employees’ motivation and effort.

These results strongly suggest that innovation is promoted by laws that limit firms’ ability to discharge employees at will. Experts call this phenomenon an “insurance effect”: feeling increased protection from the negative consequences of failure, employees are more committed to engaging in risky innovative projects. I would argue that providing employees with immunity for failed innovation projects (i.e., with freedom from being fired, so to speak) might be a better way to promote innovation than by “celebrating failures.”

Interestingly, corporate innovation is helped by protecting not only individual employees but firms too. A study of bankruptcy laws in 12 countries showed that more debtor-friendly bankruptcy codes (i.e., codes favoring firms filing for bankruptcy) had a positive effect on corporate innovation. The debtor-friendly laws are thought to encourage firm-level innovation by keeping the firms’ innovative activities alive even at bankruptcy.

Innovation and political freedoms

There is one more level of influence that is almost never considered: the level of a country’s political freedoms.

I first came across this point in 2014 while reviewing the 2013 Global Innovation Index that ranked the innovation capabilities of 142 countries by using 84 indicators, which included, among others, the quality of higher education, availability of venture capital, and government support.

Even a brief look at the Index led me to a curious observation: the top of the ranking was heavily populated by countries representing established, mature democracies. The reverse was also true: the bottom of the Index was stacked with countries with an abysmal level of democratic development.

To give this observation some statistical support, I later used the data from the 12th (2019) edition of the Global Innovation Index that analyzed the global innovation performance of approximately 130 economies (Y-axis) and plotted it against the political freedom rankings taken from the Democracy Index 2019 (X-axis). In the latter case, the countries were measured on a scale of 0 to 10.0, marking them as authoritarian regimes (0–4.0), hybrid regimes (4.0–6.0), flawed democracies (6.0–8.0), and full democracies (8.0–10.0).

The results of the regression analysis are presented below:

A reasonably strong correlation does exist indicating that the ability of a country to innovate positively correlates with the level of political freedoms in this country. To use a more straightforward language: free countries innovate better.

Some actionable recommendations follow.

To promote innovation at the first level, manifested as freedom from being discriminated against for whatever reason, organizations should energize their diversity and inclusion programs.

Promoting innovation at the organizational level appears even more straightforward as firms can protect their innovators by modifying termination policies.

To be sure, individual firms may have a limited influence over a country’s level of political freedom. And yet, every firm can — and should — make its voice heard every time our liberties are in danger, be it around the globe or in a neighboring state.