The Impact of Foreign Direct Investment on Economic Growth and Employment in South Africa: A Time Series Analysis

Abstract

The aim of this paper was an attempt to estimate the impact of foreign direct investment on economic growth and employment in South Africa for a period of 24 years, thus from 1990 to 2013. The study employed in its analysis, the unit root test to test for stationarity of the time series, the Johansen Cointegration test to test for the existence of long-run relationship among the variables and finally, Granger causality test to establish the causal relationship between the variables. Employment and GDP were found to be stationary at first order difference, while FDI was found to be stationary at level form. The cointegration test confirmed the existence of a long-run relationship between the variables. The Granger Causality test results confirmed the direction of causality which runs from FDI to GDP and from FDI to employment. From the results, there is strong evidence that from 1990 to 2013 there was a positive long-run relationship between FDI, GDP and employment in South Africa. Adding to these tests, various diagnostic tests also confirmed that the research results are reliable. In addition, the paper also identified factors that might affect the flow of foreign investors into South Africa. These factors include; return on investment, human capital, cost of labour, labour disputes and corruption. The government should emphasise more on these factors to make South Africa conducive for foreign investment. My empirical results thus suggest that FDI should be considered as a mechanism to boost long-term economic growth and employment in South Africa.

DOI: 10.5901/mjss.2014.v5n25p18