An Investigation of the Dynamic Effect of Foreign Direct Investment (FDI) and Interest Rates on GDP in South Africa

Daniel F Meyer,Thomas Habanabakize

doi:10.22610/jebs.v10i5(j).2495

Daniel F Meyer, Thomas Habanabakize

Open Access

https://doi.org/10.22610/jebs.v10i5(j).2495

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Abstract

Economic growth in South Africa has been in the â€œdoldrumsâ€ for the past decade. If well managed, foreign direct investment (FDI) and repo rate (interest rate) could have a positive impact and assist in rapid economic growth so urgently needed in South Africa. FDI has been a driving force for growth in many developing economies. Not enough has been done to attract FDI in South Africa. The country has enormous ability and capacity to attract FDI inflows and to have the advantages from it. A quantitative research approach was used to analyse the association amongst the variables which include FDI, GDP and repo rate in the South African economy. The South African Reserve Bank database was used and the period analysed is from 2000 to 2016. Statistical and econometric methods such as correlation analysis, unit root tests, ARDL Bounds test for cointegration, an error correction model (ECM), and the Granger causality tests were used. Subsequently, after the econometric model was estimated, findings indicated the existence of a long-run relationship between the three variables. While, a significant positive relationship exists between FDI and GDP, a negative long-run relationship was found between GDP and repo rate and interestingly a nonsignificant relationship between repo rate and FDI. In the short run, the positive effect of FDI on GDP is minimal whilst a significant and positive relationship exists between GDP and repo rate. The results did also show some limitations in the results, with regards to FDI and repo rate that there is no significant relationship between the variables, meaning that repo rate does not have an impact on FDIs. Although some long-run evidence was found of FDI playing a role in economic growth in South Africa, such impact is limited. Also very interesting is that the repo rate and FDI do not have a statistically significant relationship. This could be due to the rising risks associated with investments in the country. In conclusion, there are many variables which could have a positive impact on the attraction of FDIs and such factors will be explored further in future studies.

Highlights

South Africa is going through difficult internal economic conditions, with a depreciating currency, relatively high interest rates and political instability
The results show that LFDI is stationary at level or order zero I (0), while GDP and repo rate are stationary after being differentiated, they are stationary at I (1)
The aim of the study was to determine the relationship between Foreign direct investment (FDI), GDP and Repo rate in South Africa

Summary

Introduction

South Africa is going through difficult internal economic conditions, with a depreciating currency, relatively high interest rates and political instability. All of these issues are affecting economic growth which is below 1.0% (Dornbusch et al, 2011; Lings, 2017; SARB, 2018). Are economic growth and interest rates important to attract FDI? Continuous low level of economic growth affects the South Africa economy, and affects all its citizens (Harmse, 2006). If South Africa continues to have low levels of economic growth, it will have an ongoing adverse effect on poverty, unemployment and inequality and development of the economy (Hogg, 2016). The global distribution of FDI is skewed, with 68 per cent of FDI is received by the top five percent of developed countries, while the bottom five percent which are all poor developing countries, only receive 1 percent of total FDI (Chakrabarti, 2003)

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