The determinants of foreign direct investment on the South African economic growth
This study examines the economic sense in policies that promote or aim to attract more Foreign Direct Investment (FDI) by specifically focusing on the determinant of FDI and how they impact the economic growth of South Africa. The study empirically identifies and investigates the determinants of FDI on South African economic growth as well as FDI attraction and its correlation with economic growth over the period 1994 to 2010 through the utilization of Cointegration and Error-Correction Model to identify the variables in explaining FDI in South Africa. This study analysis trends and the determinants of FDI as well as their impact on the South African economy. FDI is seen as the means of providing the needed capital injection to stimulate growth in the host economy. FDI can as well result in increased employment rate, managerial skills and technological increase. Multinational Corporation (MNC) should agglomerate in such a way that is consistent with country specific externalities. There is somewhat weak evidence that FDI generates positive spillover effects to the host country. In instances where FDI generates positive productivity spillovers for domestic market economy, FDI subsidies and incentives should be warranted particularly where they have been proven to have a catalytic role in FDI attraction. The study also indicates a positive and significant impact of reform on FDI in South Africa. The study considers trade Openness, GOP per capita as well as the Cost of labour variables on explaining FDI inflows. All variables indicate correct signs and are statistically significant except for cost of labour. There is some mild evidence that labour cost impedes FD I inflows. The infrastructure levels as well as other variables are directly related to FDI. In its endeavour to attract FDI , the host country undertakes various policy incentives to attract foreign investors. All these outcomes have important implications for improving the national economy which can be helpful in the allocation of funds and resources much needed for FDI attraction. This study clearly emphasizes the role of policy in FDI attraction as well determining short-run and long-run growth in South Africa by firstly providing the macroeconomic background. Secondly, it reviews FDI literature on its determinants and related policies undertaken in South Africa. It further establishes a linear empirical relationship between these determinants, and variables to determine the direction of the causality as well as contribute to the debate on the relationship between FDI and growth through regression analysis. It assesses the growth implications of FDI in South Africa and the regional economic implications by subjecting FDI to Granger causality tests within the cointegration framework. The results suggest that in the host country, there exist a positive correlation between FDI and economic growth. In relation to other developing countries as well as the size of the economy, South Africa still receives low levels of FDI inflows with exception of 1997, 2001 and 2005. The major contributors are financial sector, mining and manufacturing sectors. One can conclude that the South African government should consider encouraging capital-intensive FDI through capacity building and further development of skilled labour force. The empirical analysis indicates that openness, the rate of exchange as well as the financial development and improved labour costs are important long run determinants of FDI . The study sets up further research that may be helpful in exposing the South African economy with greater FDI potential as well as indentify regional specific interventions needed to improve certain conditions to receive more FDI. The effects of trade liberalization imply that African countries require African specific solution. Policies that have been successful in other countries may not suggest that they equally successful in African countries.