Factors affecting economic growth
This detailed article aims to identify some of the key factors affecting economic growth. There is no doubt that the growth of an economy is dependent on several factors. These factors vary from country to country and change over time. However, there are some stable factors that can all contribute to an economy growing and thereby improving the standard of living in a nation.
List of factors affecting economic growth with analysis
Role of investment in economic growth
Investment is the process of putting money into an asset, such as a building, a company, or a stock, with the objective of making a return on it. It drives growth, as it increases the production capacity of a nation. Growing it, therefore, is a key factor in economic growth.
It is important to note that the right levels of investment can lead to higher levels of economic growth and a higher standard of living for a nation’s citizens. Investment should, however, be based on sound research, as wrong moves can lead to some significant challenges as well.
Most governments around the world promote foreign direct investment (FDI). According to OECD (2022) FDI refers to a cross-border investment in which an investor resident in one country establishes a lasting interest in and a substantial degree of influence over a business resident in another country. An example of this will be a Chinese investor investing in a company based in the USA. A British IT company opening a sales office in Malaysia to reach the Malaysian market with its services is another example of FDI.
FDI help countries develop infrastructure and increases competition in the domestic market. It also creates employment opportunities which contributes to incomes and household savings. Without substantial FDI, an economy may struggle to function as per the expected standards and rates.
According to Munoz et al. (2021) the top 10 FDI receiving countries in the world are USA, Netherlands, Luxemburg, China, UK, Hong Kong, Singapore, Switzerland, Ireland, and Germany. These are very economically developed countries where investments from foreign nationals and companies play a big role.
Effect of consumer confidence/behaviour on economic growth
Consumer behaviour is one of the key factors affecting economic growth. Consumers need to be confident about their financial well-being, as well as their ability to purchase goods and services for an economy to thrive. In uncertain times, when there is a risk of unemployment, low income, or other factors that affect a consumer’s finances, their confidence can be shaken.
An economy that suffers from low consumer confidence is therefore at a greater risk of declining growth. Confidence levels can be boosted by several factors, including strong employment figures, low inflation, and low interest rates. If consumer confidence is low, fewer people will be willing to spend money. This can, in turn, result in a decline in production and an increase in unemployment.
Quality of workforce and human capital affecting economic growth
The quality of the workforce, especially in terms of education, skills, and abilities, is an important factor that affects the economic growth of a nation. A nation with a quality workforce will be able to produce quality goods and services, thereby increasing the wealth of the nation.
According to the U.S News (2022) Japan, South Korea, Germany, China, UK, USA, Canada, Norway, Switzerland, and Denmark are the top countries in the world that have most skilled labour force. These countries have invested heavily in human capital through education; however, most of these nations often depend on foreign workers as domestic supply of skilled labour do not meet the demand due to economic growth and development.
Infrastructure affecting economic growth
Infrastructure is also one of the key factors affecting economic growth. Poor infrastructure can lead to reduced economic activities, as businesses find it difficult to operate due to poor roads, ports, and other facilities. Both public and private sector initiatives are necessary for the development of infrastructure in any country.
Political instability affecting economic growth
Political instability is also a big factor to consider. It can lead to increased levels of corruption and a decline in investor confidence. A nation with high levels of political instability is therefore likely to see a decline in economic growth.
Interest rates affecting economic growth
Interest rates also affect the economic growth of a nation. Higher interest rates cause people to pay more interests on credit cards and loans. This may encourage them not to borrow and spend which slows down the economic growth. Central banks lower interest rates to stimulate economic growth; however, lower rates also cause higher inflation.
Technology affecting economic growth
Technology has always played a crucial role in the economic growth of many countries. Consider the case of Japan which is famous for excellence and innovation. It is one of the largest economies in the world where high-quality products are produced every day and exported around the world. No wonder why Americans buy Toyota more than any other car brand (Welch and Coppola, 2022).
Also consider the case of South Korea. Just 50 years back, it was a relatively small and agriculture-based economy. It is now one of top 15 economies in the world – thanks to its tech development. Indeed, it is a global leader in information and communication technologies.
Summary of factors affecting economic growth
Economic growth often enables countries to expand their production capacity and their incomes from selling final goods and services in international markets. However, growth comes up with some associated challenges as well. Today’s global economy is more complex than ever before. It is also facing unprecedented challenges.
Rapidly rising inequality, the threat of climate change, power struggles among superpowers, political instabilities, and digital transformation are some of the issues confronting policymakers and businesses around the world. That being said, there are still plenty of positive developments and factors (as discussed above) that could help boost growth in almost every economy.
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Last update: 08 August 2022
OECD (2022) Foreign Direct Investment (FDI), available at: https://www.oecd-ilibrary.org/finance-and-investment/foreign-direct-investment-fdi/indicator-group/english_9a523b18-en (accessed 08 August 2022)
Munoz, C. Matei, S. & Howell, K. (2021) The world’s top recipients of foreign direct investment, available at: https://blogs.imf.org/2021/12/16/the-worlds-top-recipients-of-foreign-direct-investment/# (accessed 07 August 2022)
U.S News (2022) These countries have the most skilled labor force, available at: https://www.usnews.com/news/best-countries/rankings/skilled-labor-force (accessed 07 August 2022)
Welch, D. and Coppola, G. (2022) GM loses U.S. sales crown to Toyota, available at: https://www.bloomberg.com/news/articles/2022-01-04/carmakers-close-rough-year-as-issues-linger-auto-sales-update?sref=Vefqd1fk (accessed 01 August 2022)
Author: M Rahman
M Rahman writes extensively online and offline with an emphasis on business management, marketing, and tourism. He is a lecturer in Management and Marketing. He holds an MSc in Tourism & Hospitality from the University of Sunderland. Also, graduated from Leeds Metropolitan University with a BA in Business & Management Studies and completed a DTLLS (Diploma in Teaching in the Life-Long Learning Sector) from London South Bank University.