The effect of foreign portfolio investment on economic growth in South Africa

Mpofu, Melusi (2014-12)

Thesis (MDF)--Stellenbosch University, 2014.


Based on quarterly data for the period 1985 to 2012, this study analyses the effect of Foreign Portfolio Investment on the growth of the South African economy. In order to support the country’s economic growth, South Africa needs foreign capital in the form of foreign capital flows and these include both foreign direct investment and foreign portfolio investment. Given the low national savings rate in South Africa, foreign portfolio inflows play an important role in the sustenance of higher levels of investment and growth. The study employed the Johansen Cointegration technique to analyse the long-run relationship and the Vector Error Correction Model for the short-term interaction between variables. The long-run results illustrated that there is a negative relationship between Gross Domestic Product and foreign portfolio investment. However in the short run the results indicate a positive relationship between foreign portfolio investment and gross domestic product. These results are supported by the Granger causality test which shows that foreign portfolio investment Granger causes Gross domestic product. The findings from the study suggest that authorities should take advantage of foreign portfolio investment in the short run. However the results also suggest that foreign direct investment is another important source of capital in the long term.

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