Financial Inclusion, Energy Transition, and Human Capital Impact on Economic Sustainability: Mediating Role of Digital Transformation

Abstract

This study examines how financial inclusion, energy transition, and human capital investment influence economic sustainability in developing economies and takes digital transformation as an intermediate variable. Based on a balanced panel dataset of 44 developing economies from 2015-2024, the study applies Pooled Ordinary Least Squares, Fixed Effects and Random Effects models. Financial inclusion is represented by domestic credit to the private sector, energy transition is represented by access to clean fuels to cook, and human capital is represented by government spending on education. Economic sustainability by the level of foreign direct investment is in terms of net inflows as a percentage of GDP and the mediating variable in digital transformation is the integration of digital technologies across operations, including broadband, internet usage, digital skills, and ICT infrastructure. The Hausman test tests whether individual effects are correlated with the regressors. If correlated, then Fixed Effects model is preferred otherwise the Random Effects model is more appropriate. Empirical evidence of this study shows that financial inclusion, energy transition, and human capital investment have a very positive relationship with FDI-measured by indicators such as GDP growth stability, environmental-economic balance and inclusive growth. Digital transformation mediates all three relationships partially as it is an amplifying channel by which inclusion, energy and human capital gains will attain more foreign investment. This study examines how financial inclusion and FDI influence sustainable development, offering insights for policymakers aiming to enhance inclusive growth, promote affordable clean energy, and drive economic growth, employment, and decent work aligned with SDGs 4, 7, and 8 in developing economies. Keywords: Financial inclusion, energy transition, human capital, digital transformation, economic sustainability, FDI, panel data, developing economies, SDGs . JEL Classification: G20; Q42; I25; O33; F21; C23