What you are describing is a Combobox and has been in use for as long as I can think about GUIs. The concept has gained new momentum in the web with the further development of dynamic elements and web apps – most notably google's search box with it's suggestions-as-you-type.
Chrome's "Omnibar" is, basically, the same thing: It's a text field you can type in anything you want, but it will also suggest stuff you previously entered.
So, yes, I think it is save to say that the basic concept is working for users.
The cases above, however, do not have any "data entry" aspect. Whatever you type into the omnibar or into google's search field is temporary data that's only used once. Thus it's usually no problem that there's lots and lots of entries, because only very few will be used over and over again.
If your application tries to establish a norm for data input I would highly suggest using a more strict type of input. The very nature of "enter anything you want" will result in people entering anything they want, and therefore lead to lots and lots of (probably redundant) entries.
So, in short: