Beyond the Short Term: The Keys to Sustainable Economic Growth

The Complex Mosaic of Economic Growth in the Long Term

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Macroeconomic analysis Foreign markets Economic policy Foreign market analysis

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When companies consider expanding into a foreign market, they often focus on short-term economic growth prospects. An expanding economy offers attractive opportunities due to growing demand, which can increase the chances of success for exporting companies. However, it is crucial not to underestimate the importance of long-term prospects. The investments required to enter a new market can be high and difficult to recover if the market does not prove to be profitable. For this reason, it is crucial to also consider the factors that influence long-term economic growth when deciding to internationalize.

The Complex Mosaic of Economic Growth

A country's economy is a complex mosaic where different factors interact to determine per capita GDP growth. Traditionally, great importance has been given to macroeconomic variables. A recent empirical analysis, taken from a thesis entitled "Impact of Immigration and Trade Openness on Long-Term Economic Determinants," examined these factors, identifying institutional quality as the most influential among them.

Details of Estimated Coefficients

Below is a table with the estimated coefficients of a fixed effects model, taken from the aforementioned thesis, which uses per capita GDP as the dependent variable. The explanatory variables considered are various:

  • Lag of per capita GDP, which shows how past GDP can influence current GDP, suggesting a persistent economic trend;
  • Savings, which represents the percentage of income set aside for future investments, is crucial for stimulating economic growth;
  • Technology, through innovation and technical progress, improves the productivity and competitiveness of an economy;
  • Inflow of Foreign Direct Investment (FDI), which reflects the capital and resources transferred by foreign investors to the country, can stimulate economic development and promote growth;
  • Institutional quality, which indicates how strong and reliable a country's institutions are, is essential for ensuring sustainable economic growth;
  • Talent attractiveness, which measures the country's ability to attract highly qualified professionals, is fundamental for supporting innovation and competitiveness;
  • Percentage of regular immigrants on the population enriches the host country's human capital, contributing positively to per capita GDP.

Economic growth model

Variables Coefficient[1] p-value[1]
Lag of per capita GDP 0,838*** 0,000
Savings 0,064*** 0,000
Technology 0,044*** 0,000
Inflow of FDI 0,006*** 0,001
WGI 0,133*** 0,000
Attractiveness 0,036*** 0,001
Immigrants/pop 0,028*** 0,000
Constant 0,822*** 0,000
[1] The asterisks next to the coefficients indicate the level of statistical significance: one asterisk for a p-value less than 0.15, two asterisks for a p-value less than 0.05, and three asterisks for a p-value less than 0.01. This notation provides an immediate indication of the robustness of the estimates, facilitating the evaluation of the impact of each factor on per capita GDP.

The Impact of Immigration: A New Perspective

The positive effect of immigration on per capita GDP deserves in-depth reflection. Although it is not surprising that immigration can influence total GDP, the specific impact on per capita GDP is less intuitive. Studies such as Borjas (1999) have shown that immigration can benefit the labor market, particularly when immigrants bring required skills. Analyses by Card (2005) and Ottaviano and Peri (2012) confirm that immigration can increase the overall productivity of an economy, but this also depends on other analyzed factors.
Distinguishing between regular and skilled immigration versus less skilled immigration is crucial. Immigrants with specific skills and training tend to significantly improve per capita GDP, as evidenced by Dustmann and Frattini (2014). Conversely, less skilled immigrants may not have the same positive impact.

Conclusions

Analyzing a country's growth potential is valuable information when selecting markets for internationalization projects. Indeed, an internationalization strategy that considers both short-term and long-term prospects can limit the risks of investing in a country characterized only by a short-term expansion cycle but with significant limitations to long-term growth.
In general, long-term economic growth results from a complex interaction between economic and institutional variables. Among these, it seems significant to highlight in a historical phase where many developed economies are characterized by strong population aging, how immigration, if well managed and integrated with training plans, can represent a valuable resource for the country's growth.