Long-Run Heterogeneous Effects of Entrepreneurship, Institutional Quality, and Macroeconomic Stability on GDP per Capita: Evidence from EU-26 Countries

This study investigates the determinants of GDP per capita across 26 European Union member states over the period of 2006–2024, with a particular focus on entrepreneurship, institutional quality, and macroeconomic factors. Given the presence of long-run income differences across EU countries, the analysis explicitly accounts for structural heterogeneity in economic development and institutional capacity. To ensure robust estimation in the presence of cross-sectional dependence and slope heterogeneity, the study employs advanced panel econometric techniques, including tests for cross-sectional dependence, unit roots, and cointegration. Long-run relationships and short-run dynamics are estimated using the Cross-Sectionally Augmented Autoregressive Distributed Lag (CS-ARDL) model, complemented by robustness checks based on the Augmented Mean Group (AMG) and Common Correlated Effects Mean Group (CCEMG) estimators. In addition, the Method of Moments Quantile Regression (MMQR) is applied to capture heterogeneity across different points of the income distribution, thereby reflecting long-run income disparities among EU member states. The empirical results confirm the existence of a stable long-run equilibrium relationship among the variables. The baseline CS-ARDL estimates indicate that institutional quality, entrepreneurial activity, trade openness, and government expenditure exert positive and statistically significant effects on GDP per capita, while financial development exhibits a negative effect and foreign direct investment remains insignificant. In the short run, entrepreneurship and trade openness contribute positively to GDP per capita, whereas government expenditure and credit expansion generate contractionary effects. The robustness analysis using AMG and CCEMG estimators largely supports these findings, as the direction of the coefficients remains consistent across alternative specifications, although some variation in statistical significance is observed due to differences in the treatment of cross-sectional dependence and unobserved common factors. The MMQR results further reveal substantial heterogeneity across the income distribution, indicating that the effects of key determinants vary depending on countries’ long-run income levels. In particular, trade openness and institutional quality exert stronger positive effects in lower-income quantiles, while the adverse effects of excessive financial development are more pronounced in higher-income quantiles. Overall, the findings underscore the importance of promoting productive entrepreneurship, strengthening institutional frameworks, facilitating trade integration, and ensuring efficient financial intermediation to enhance GDP per capita within the European Union. The results also highlight the need for differentiated policy approaches that explicitly account for long-run income heterogeneity, structural differences, and varying institutional capacities across EU member states.

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