| Summary: | 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. === Thesis (M. Commerce in Economics) North-West University, Mafikeng Campus, 2012
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