The Impact of Investment and Capital Accumulation on Economic Growth: A Review of Theory and Empirical Evidence
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Investment and the accumulation of physical capital have occupied a central place in growth economics since the earliest formal growth models of the 1930s and 1940s. Yet the precise nature of the relationship between investment and long-run growth - its magnitude, its direction of causation, and the conditions under which it holds - remains a matter of active debate. This paper conducts a systematic, narrative review of the theoretical and empirical literature on the impact of investment and capital accumulation on economic growth. It traces the evolution of the analysis from the Harrod-Domar model, in which growth is mechanically tied to the savings rate and the capital-output ratio, through the neoclassical Solow framework, in which diminishing returns to capital limit the long-run growth effect of investment to transitional dynamics, to more recent empirical work that examines the composition of investment, the direction of causality between investment and growth, and the mediating roles of financial development and institutional quality. The review finds that the investment share of GDP is among the most robust correlates of growth in cross-country data, but that the strength of this relationship depends heavily on the type of capital being accumulated, the efficiency with which savings are intermediated into productive investment, and the quality of the institutions that govern property rights and contract enforcement. The paper concludes with implications for policies aimed at mobilizing investment as a driver of growth, particularly in developing and transition economies.
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