Threshold Effects of Fixed Capital Formation on Economic Growth in Asian Countries

Abstract

This study investigates the threshold effects of fixed capital formation (FCF) on economic growth in selected Asian countries over the period 1991–2020. Drawing on a balanced panel of eleven Asian economies and employing a panel Autoregressive Distributed Lag (ARDL) framework, the study examines both short-run and long-run dynamics between FCF and economic growth while controlling for key macroeconomic factors. Panel unit root tests, panel cointegration techniques, and error-correction–based estimators are applied to ensure robustness. The results provide strong evidence that fixed capital formation exerts a positive and statistically significant impact on economic growth in the long run, whereas short-run effects are weaker and heterogeneous across countries due to adjustment costs and investment gestation lags. Causality analysis further indicates bidirectional causality between FCF and economic growth, supporting the presence of a virtuous investment–growth cycle. The findings underscore the importance of prioritizing productive capital investment, improving investment efficiency, and maintaining macroeconomic stability to sustain long-term growth in Asian economies.

Keywords: Fixed Capital Formation; Economic Growth; Panel ARDL; Investment; Asian Economies