Trade patterns and foreign direct investment in the Southern African development community

Abstract

This thesis focuses on the relationship between trade and FDI in the SADC. While FDI is seen as a stimulus for growth and development, Africa is lagging behind other regions in attracting FDI. Whilst a number of reasons have been explored in the literature, the potential link between trade and FDI has not been explored in the African context. This may be potentially important, since African governments have been engaging in trade liberalisation and trade promotion over the past two decades. In this thesis, gravity modelling is used to investigate the trade-FDI relationship. Two single equation regression models are used in a preliminary investigation to evaluate aggregate trade and FDI. The third model consists of six panel regressions that evaluate the different relationships between the individual SADC countries and their individual major trading partners. A causality test is also carried out to confirm the relevance of trade as a determinant of FDI in the SADC. Overall results indicate that, in the specific case of the SADC, SADC exports significantly cause FDI. Distance from home countries and political instability are the most significant negative forces that affect FDI inflows. Home country exports deliver mixed results and these results suggest that the United States and the United Kingdom have a different FDI-trade relationship with the SADC than continental Europe, whereas Japan's exports prove insignificant. The policy implications are that the SADC will need to focus on attracting investment from countries that provide for complementary FDI and trade as this is optimal for poverty alleviation and job creation. Further research should focus on these policy areas and take into account the relevance of trade as a determinant of FDI.