The Effect of Manufacturing Value Added on Economic Growth: Empirical Evidence from Europe

The manufacturing sector plays an essential role in achieving economic growth in any nation. Because of the growing phenomenon of deindustrialization the manufacturing sector has become increasingly important as the engine and driver of economic growth in both developing and developed economies. The purpose of this study is to uncover the impact of manufacturing sector on economic growth in selected European economies. Moreover, the association between investment, labor force and technology with economic growth in selected economies has been investigated. This thesis is an empirical analysis to assess the factors which affect economic growth in 25 of Europe’s most competitive economies by conducting a descriptive analysis, Pearson correlation, pooled OLS, fixed and random effects model. In this study as the dependent variable, GDP has been used as a measure of economic growth. On the other hand, manufacturing value added, gross fixed capital formation, employment ratio and high-tech export are employed as explanatory variables. To quantify the relationship between explanatory variables and economic growth, an eclectic model consisting of both the Kaldor’s first law of growth and the neoclassical growth model was estimated. Moreover in order to search for the factors affecting economic growth, a panel data approach methods have been employed. A sample data of 25 Europe’s most competitive economies from the World Economy Forum (WEF) and World Bank database are selected on an annual basis, from 1995 to 2016. The result of this study revealed that the economic growth has a significantly positive association with manufacturing, labor force, and technology. The unexpected interesting result is that the association between economic growth and investment is significantly negative. Keywords: Economic Growth, Manufacturing Value Added, European Economy, Kaldorean Approach and Neoclassical Growth Model.