Exploring the Effects of Foreign Direct Investments on South Africa Economic Growth

Abstract

Foreign direct investment flows have grown rapidly as the global economy has become more integrated. Developing countries consider FDI as a driving force to economic growth as it contributes to technology transfer, infrastructure improvement, employment creation and trade performance. However, it has been of great concern to many economists on how FDIs affect the economic growth of the host country. The study examines the effect of FDIs on South Africa’s economic growth using annual time series data for the period 1980 to 2021. The autoregressive distributed lag model (ARDL) bounds testing approach to cointegration was used to test the long run relationship between economic growth, foreign direct investment, and exchange rate. The study found that FDI has a positive effect on economic growth rate thus validating the FDI-induced growth nexus in the South African economy, while exchange rate had a negative significant impact on economic growth. This study suggests that policymakers adopt policies aimed at infrastructural development that will attract more FDIs and enhance the country’s economic growth. Though there is a prime need to attract more foreign investors in South Africa, it is important to concede that attracting inward FDIs alone is not enough for sustainable economic growth and development. The government will have to undertake reforms with clear objectives and commitments.

Keywords: Economic Growth; Foreign Direct Investment; Exchange Rate; ARDL