INNOVATIONS, FINANCIAL MARKETS DEVELOPMENT, CAPITAL INFLOWS, AND ECONOMIC GROWTH DYNAMICS IN EUROPEAN COUNTRIES

Анотація

Factors that affect economic growth have been studied for a long time. At the same time, traditional economic models struggle to explain why, after reaching the economic frontier, it becomes much harder to keep up with other advanced economies solely through traditional factors such as capital accumulation. Although much research argues that human capital and innovation make growth possible after traditional factors lose their influence, there is still insufficient understanding of how innovative capital interacts with other fundamental drivers of economic development. To address this gap, our research seeks to answer the following question: “Why did Europe lose leadership in innovations, growth, and financial development? Why are there significant disparities in these indicators among European Countries, and how can Europe deal with these challenges?” This research examines how the economic growth of European economies is affected by a set of indicators describing the level of financial market development, innovation activity, and the volume of foreign capital. Systematization of the existing approaches suggests that these factors influence economies differently depending on their structural maturity. Our findings, based on a panel fixed-effects model, demonstrate that research and development, as a proxy for innovation, has the greatest impact on economic growth across all groups of countries. Moreover, foreign capital and innovation act as complementary processes that together have the largest impact on economic growth in most EU economies. In the long term, R&D capital consistently supports growth, with stronger effects in countries that invest more in innovation. In the short term, foreign capital – whether foreign direct investment or debt – often amplifies the influence of innovation on GDP. The results may be useful for policymakers and institutions working to strengthen innovation capacity and support sustainable economic growth in Europe.

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