AN EMPIRICAL ANALYSIS OF THE GROWTH IMPACT OF FOREIGN DIRECT INVESTMENT IN THE SOUTH AFRICAN ECONOMY

Authors

  • Carl Julien Teunen
  • Gabila Nubong
  • Carl Teunen
  • Gabila Nubong

Keywords:

Economic growth, Foreign Direct Investment, Technology spillover, Domestic investment, Crowding out effect.

Abstract

South Africa’s economy is confronted by the triple threat of poverty, unemployment, and inequality, all of which have been exacerbated by the country’s inability to maintain a positive growth rate. The rising globalisation of the world has increased the attractiveness of Foreign Direct Investment for emerging markets. To determine the success of FDI in improving economic growth in the South African economy, a modified Cobb-Douglas function was created using data from 1970 to 2019, with capital disaggregated into a foreign and a domestic component. Domestic investment had a

positive and statistically significant effect on economic growth when an Autoregressive Distributed Lag model was used; however, FDI and labour productivity had a negative effect, with labour productivity being statistically significant. However, when the lagged values are analysed, FDI produces statistically significant results, demonstrating that foreign capital may take time to materialise completely. Additional application of the Toda-Yamamoto causality test demonstrates that one-way causation exists between FDI and economic growth. This suggests that while FDI has the potential to be a long-term solution to South Africa’s stunted growth, the concerns of an untrained workforce and inadequate infrastructure must be addressed for FDI to be effectively utilised.

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Published

2022-04-16