The impact of foreign direct investment on economic growth in South Africa

Abstract

Foreign direct investment (FDI) is considered one of the most essential drivers for economic growth. Despite their previous small or even declining share of global investments, foreign direct investment (FDI) has risen to become the most prominent means of generating external resource flows to developing countries and has become an important portion of capital formation in these economies. Motivated by the concerns of global decline in FDI distribution, this study examined the impact of foreign direct investment on economic growth in South Africa, using time series annual data for the period 1985 to 2019. The study employed a total of 170 observations of foreign direct investment, economic growth, inflation, real interest rate, and saving rate. Co-integration methods, ARDL and ECM were used to analyse the data. To avoid spurious regression results on time series data, the researcher tested for stationarity of the data by using Augmented Dickey-Fuller test and Phillips-Perron unit root tests. The unit root analysis was conducted on the variables and the results show that GDP and FDI do not exhibit any trends suggesting that they are integrated of order zero. Trends, however, are noticeable in the rest of the variables - interest rate, inflation and saving rate. This implies that the variables are not stationary at level form. After first differencing, all variables are stationary as none of them exhibit any trend. This implies that the variables used in this study are integrated to order I(0) and I(1). The cointegration test results show that the null hypothesis of no cointegration was rejected to conclude that a long-run relationship exists between economic growth, foreign direct investment, inflation, interest rate and saving rate. ARDL-ECM model regression results of the long run model show a negative relationship between foreign direct investment and economic growth whilst foreign direct investment was found to be insignificant in explaining short-term growth. The granger causality shows no causality between FDI and economic growth. The negative relationship between FDI and economic growth registers uncertainty on whether FDI has benefited the economic growth of South Africa. The researcher recommends that government should come with ways or strategies which would best attract foreign direct investment and ensure that the country’s affairs are in order, for example, combat corruption and crime while also ensuring that there is political stability and well managed state-owned enterprises.