Investment, Industrialization, and Employment as Drivers of Economic Growth: Evidence from a Toda Yamamoto VAR Framework

Abstract

Understanding the drivers of sustainable economic growth remains a central challenging for large emerging economies, particularly in China, where investment, industrial upgrading, and employment reallocation have historically underpinned rapid development. In the context of rising global uncertainties such as trade tensions, shifting investment patterns, and employment reallocation across sectors identifying how investment, industrialization, and labor dynamics jointly shape economic growth has become increasingly important. Recent global and domestic challenges such as rising trade protectionism, persistent uncertainty in global value chains, and growing pressure to rebalance growth toward productivity rather than scale have intensified policy debates in China regarding the sustainability of traditional growth drivers. These challenges raise critical questions about whether investment and industrial activity continue to drive growth, how employment responds to structural shifts, and whether the expanding services sector can effectively support long-term economic performance. Against this backdrop, this study aims to test the hypothesis that investment, industrial output, trade openness, and sectoral employment exert causal and dynamic effects on China’s economic growth, with industrialization and capital accumulation remaining the dominant forces. To address this objective, the study employs a Toda–Yamamoto vector autoregression (VAR) approach using WDI annual data for China from 1991 to 2024, complemented by modified wald (MWALD) causality tests, impulse response functions, and forecast error variance decomposition. The empirical results reveal strong unidirectional causality from gross fixed capital formation, industrial value added, trade, and services employment to GDP growth, while feedback effects from growth to foreign direct investment and inflation are also observed. Impulse response analysis confirms that positive shocks to investment, industrial output, and trade generate persistent increases in economic growth, whereas employment responds positively to growth shocks, reflecting China’s ongoing structural transformation. Variance decomposition results further show that investment and industrial factors explain a substantial share of growth fluctuations over the medium and long run. The study offers important policy insights for sustaining growth through targeted investment, industrial innovation, and labor-market alignment in the face of evolving domestic and global challenges.