Analysis of trends and key determinants of foreign direct investment (FDI) inflow into South Africa

Hlongwana, Innocent Sthembiso (2015-04)

Thesis (MDF)--Stellenbosch University, 2015.


ENGLISH ABSTRACT: The traction of Foreign Direct Investment (FDI) has been viewed as a viable strategy for growing the economy and for solving such challenges as unemployment, the acquire skills and technology transfer. Many developing economies have implemented a number of macro-economic policies with the aim of boosting their economies. South Africa has, similarly, implemented a range of policies – including incentives aimed at attracting FDI. This study analyses the inward trends of FDI for South Africa and the key determinants of FDI. The study uses as variables annual key economic indicators such as gross domestic product (GDP), government size (GOVSIZ), export/import trade, the exchange rate, inflation and the interest rate, for the period 1970 to 2013. The study reviews global FDI trends and their geographic distribution as well as FDI trends in Africa and in key sectors, including FDI trends and FDI policy in South Africa. The literature review analyses the fundamental theories of international trade and foreign investment. A number of empirical researches indicate that factors such as skilled labour, infrastructure, financial development, political stability, market size, natural resources and better economic management (comparatively speaking) are key determinants for FDI. Following the theoretical review, the formulation of an empirical model to estimate the empirical determinants of South African FDI is discussed. The use of Johansen cointegration and the vector error correction model (VECM) framework is described. The discussion of cointegration analysis includes the use of impulse response and decomposition analysis to establish the long- and short-run determinants of FDI in South Africa. The results from the trend analysis showed that South Africa is still performing poorly in terms of receiving FDI when compared to other developing countries in regions such as Latin America and South Asia. The information and communications technology (ICT) and financial services sector are currently the major recipient of FDI, followed by manufacturing and mining. The USA, followed by the UK, are the primary sources of FDI in South Africa. The empirical results showed that FDI, GDP, GOVSIZ, trade, inflation, exchange and return on credit were long-run determinants. The VECM results revealed that GDP, GOVSIZ, trade openness and return on credit tend to have a positive impact on FDI, whereas the exchange rate and inflation have a negative impact on it.

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