Inward FDI and economic spillover effects : the case of the automotive industry in South Africa

Abstract

The present study investigates the economic spillover effects of inward Foreign Direct Investment (FDI) in South Africa's automotive sector. To achieve this objective, seminal and contemporary theories in international business, economics, trade and industry were used to illuminate the driving aspects of economic spillover effects. In particular, the Eclectic Theory was deployed to illuminate firm level efficiencies that drive the process of the internationalisation of business. Secondary data was collected from reliable sources. The time span of data collected is from 1990 to 2020. Consistent with the objectives of the study, the Vector Error Correction Model (VECM) was adopted to test the short-run and long-run economic spillover effects in inward FDI in the automotive industry in South Africa. In addition, the study employed the Panel Auto Distributive Lagged Model and Panel Generalised Methods of Moments (GMM) to test the pattern of the economic spillover effects. The results of these tests suggest that there are positive and statistically significant relationships between value chains (geographical location) and economic spillover. That means that the procurement of factor inputs from the host market by MNEs will result in economic spillover in the South African automotive industry. On the contrary, the results suggest a significant negative relationship between Horizontal FDI and Economic spillover in the South African automotive sector. The study recommends that South African domestic firms need to improve absorptive capacities so that they can be able to provide value chains to investing MNEs in the automotive industry and so that they may reap the benefits of economic spillover. In its own way, the present study contributes to the growing literature in the subject areas of commerce, economics, business and international trade.