Financial Development and Labour Productivity in G7 Economies: The Conditional Roles of FDI and Capital Formation
Year: 2026
Type: article
Abstract: This study investigates whether the long-run relationship between financial development and labour productivity in the G7 economies is conditional on foreign direct investment (FDI) and gross fixed capital formation. Using a balanced panel of seven countries over 2000–2024, the analysis employs panel fully modified ordinary least squares (FMOLS), dynamic ordinary least squares (DOLS), and canonical cointegrating regression (CCR), complemented by the common correlated effects mean group (CCEMG) and augmented mean group (AMG) estimators to assess robustness to cross-sectional dependence and slope heterogeneity. The results reveal substantial estimator sensitivity in the finance-productivity relationship: domestic credit to the private sector is positively associated with labour productivity under FMOLS and CCR but negatively associated under DOLS. By contrast, digital connectivity and research and development exhibit comparatively consistent positive associations with productivity, whereas gross fixed capital formation is negatively associated and FDI displays no robust unconditional relationship. Interaction estimates provide limited evidence that the finance-productivity association depends on the investment environment. The credit-FDI interaction is negative and statistically significant under FMOLS but not robust across alternative estimators, while the credit-capital formation interaction becomes insignificant when both interaction terms are included. Further robustness analyses underscore considerable cross-country heterogeneity. Overall, the findings qualify conventional expectations regarding the productivity-enhancing role of financial development and suggest that its long-run association with productivity is sensitive to model specification and country-specific conditions. By distinguishing relatively robust correlates from estimator-dependent results, this study contributes nuanced evidence on the conditional and heterogeneous finance-productivity nexus in advanced economies. The findings are interpreted as long-run associations rather than causal effects.
Source: Economies
Institutions: Tashkent University of Information Technology, Mamun University, Jeonbuk National University, Alfraganus University, Termez University of Economics and Service, Tashkent State University of Economics, Tashkent International University, O‘zbekiston Respublikasi Prezident huzuridagi davlat siyosati va boshqaruv akademiyasi, Tashkent Institute of Irrigation and Agricultural Mechanization Engineers
Language: English
Domain: Social Sciences
Open Access status: gold
Estimated APC paid: $2,172
OpenAlex ID: W7225180877