The impact of physical capital, industry value added and foreign direct investment on economic growth: Evidence from EU countries

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Abstract
This study examines the relationships among economic growth, physical capital, industry value added, foreign direct investment, and the labour force in a panel of European Union (EU) countries over the period 1995-2024, using panel data analysis. First, a cross-sectional dependence test was applied across the series, revealing a strong interdependence structure across countries. Unit root tests were then conducted, and the Panel ARDL method was deemed appropriate based on the series' stationarity. However, due to the strong cross-sectional dependence and heterogeneity identified in the panel, it was ultimately decided to use the CS-ARDL model to obtain more reliable results. The findings indicate that the industry value-added variable has an adverse, statistically significant effect on economic growth in the short-term analysis. In contrast, the short-term effects of the other variables are not significant. The long-term analysis results indicate that industry value added and physical capital variables positively affect economic growth. In contrast, the long-term coefficients for the foreign direct investment and labour force variables were not statistically significant. Overall, these results indicate that physical capital and value-added creation in industrial production are the primary determinants of economic growth sustainability in a sample of EU countries. However, the failure of foreign direct investment and labour supply to make a significant long-term contribution to growth suggests a need to revise structural policies in these areas.

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