Dynamics of FDI and Industrialisation Interplay on G7 Growth: Panel Data, 1982-2024
Keywords:
FDI, Economy Growth, Industrialization, G7Abstract
This study analyses the dynamics of interaction among Foreign Direct Investment (FDI), industrialisation, and industrial labour and their effects on economic growth in G7 countries during the period 1982-2024. The objective is to examine the relationship among these three factors that can drive long-term growth, while taking into account the roles of international trade and inflation. Using unbalanced panel data from the World Development Indicators, this study applies a fixed-effects model, selected through a Hausman test, to analyse the direct impact of key variables and the interaction effects between FDI and industrial output, as well as between FDI and industrial labour. Empirical results show that, contrary to theoretical expectations, neither FDI, industrialisation, nor industrial labour has a significant positive effect on economic growth among G7 countries. The interaction between FDI and industrialisation has a significant negative impact, indicating diminishing returns in mature advanced economies. The only consistent and significant driver of growth is international trade integration. These findings highlight the complexity of the FDI-growth relationship in developed countries and contribute to the literature by revealing internal heterogeneity and non-linear interaction dynamics, emphasising that the benefits of FDI are not automatic but rather highly dependent on structural conditions and domestic absorption capacity that has reached a certain saturation point. The policy implications of this study call for an approach that focuses more on strengthening trade and innovation rather than simply attracting foreign capital inflows.
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