The world's largest economy the U.S. came in at number 10. While no euro zone country made it to the top 10 in economic freedom, Switzerland and Denmark were placed 5th and 9th respectively.

The ranking, which covers 185 countries, is based on 10 factors ranging from freedom in trade and labor markets to the extent of government spending.

Hong Kong and Singapore have occupied the top two spots since the Index was launched almost two decades ago, owing to their efficient and transparent legal frameworks, vibrant engagement in global trade and investment and low tolerance for corruption, according to the Heritage Foundation report.

"The biggest freedom area is still Asia, (it) remains the brightest spot in terms of economic freedom. There are no euro currency countries anymore in the top 10. It was not really a good year for economic freedom," Edwin Feulner, president of the Heritage Foundation told CNBC on Thursday.

In 2013, Ireland fell down the ranks from 9th to 11th place, which meant that no country from the single currency bloc is represented in the top 10. Other European nations including France, Greece, Italy, Portugal, and the United Kingdom each received scores similar or lower than those they first registered nearly two decades ago.

Overall, 35 countries saw declines in their economic freedom scores by one point or more over the past year, compared with 31 countries which saw an increase of that magnitude, which Feulner said is a reflection of policy stagnation. Each nation is marked on a scale of 0-100, with the latter representing the most freedom.

While on the whole government spending scores improved as many countries attempted to restrict their rapid budget growth, regulatory efficiency marks declined as a number of governments increased minimum wages and tightened control over labor markets. (Read More: Is Asia's Hot Spot for Investment Under Threat?)

US Faces Declining Freedom

The U.S. score fell to 76 from 76.3 in 2012 - the fifth straight year of decline. It is now at its lowest level since 2000. It also came in below neighboring Canada which was placed 6th.

"Entrepreneurial growth is stifled by evermore-bloated government and a trend toward cronyism that erodes the rule of law," Feulner wrote.

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