The Effect of Foreign Direct Investment on Economic Growth: Evidence from South Africa

Abstract

Foreign direct investment amongst other mechanisms provides capital inflow meant to stimulate economic growth. Apart from promoting economic growth, FDI can also lead to increase in employment, technology, technical knowhow and managerial skills. South Africa has implemented various policy initiatives in attempts to attract foreign investment. This study investigates on the effect of foreign direct investment on economic growth, with particular reference to the South African economy. The period of study is from 1980 to 2010. Johansen cointegration and Vector Error Correction Modelling (VECM) framework where utilised as estimation techniques. Variables specified in the methodology include real gross domestic product (RGDP), foreign direct investment (FDI), domestic investment (INVE), real exchange rate (REXCH) and foreign marketable debt (DEBT). The long run results showed that FDI, REXCH and DEBT have a negative impact on growth. INVE has a positive impact on growth. The impulse response and variance decomposition analysis complemented the long and short-run findings. Conclusions and policy recommendations were made using these results.

DOI: 10.5901/mjss.2014.v5n10p95