Abstract
The objective of this research study was to examine the influence of foreign direct investment on economic growth in South Africa during the period 1994-2014. Time series annual data on real gross domestic product (GDP) growth, foreign direct investment, and terms of trade were sourced from the South African Reserve Bank (SARB) historical macroeconomic statistics online database. Unit root and cointegration properties of data were analysed using Augmented Dickey-Fuller and Johansen cointegration test techniques, respectively. The Vector Error Correction model was applied to compute long-run and short-run parameters of endogenous variables in the model. Results of the long-run section of the cointegrating equation show that for every 1 percent rise in foreign direct investment, there was a statistically significant rise in growth of gross domestic product by about 0.05 percentage points during the period 1994-2014. Results of the error correction component of the gross domestic product growth equation show that about 62 percent of the deviance from the long-run stability pathway was rectified in the first year after the deviation occurred. Results of the impulse response functions indicate that a one standard deviation in foreign direct investment had a statistically significant and positive effect on future gross domestic product growth after the first year. Keywords: Foreign direct investment (FDI), gross domestic product (GDP) growth, Vector Error Correction (VEC) model DOI: 10.7176/JESD/12-12-01 Publication date: June 30 th 2021
Highlights
The subject of sustainable and high economic growth remains a permanent item on global economic development agenda and numerous macroeconomic policy discussions
In conformity to Mazenda (2014) who reported a gross domestic product (GDP) growth speed of adjustment of about 29 percent in South Africa, results of the error correction component of the GDP growth equation in this study reveal that about 62 percent of the deviance from the long-run equilibrium trajectory was rectified in the first year following occurrence of the deviance during the period 1994-2014
Based on results from this study, increases in foreign direct investment significantly lead to economic growth in the country
Summary
The subject of sustainable and high economic growth remains a permanent item on global economic development agenda and numerous macroeconomic policy discussions. In an effort to stimulate economic growth, government and economic policy makers in several economies consider foreign direct investment (FDI) as one of the key instruments that stimulate growth in several developing and emerging economies. Unless sound economic policy initiatives are implemented, South Africa’s economic growth is likely to remain sluggish over the coming years since the country faces a daunting challenge of competing with other emerging economies for the much needed foreign direct investment. Research objective To examine the impact of foreign direct investment on economic growth in South Africa during the period 1994-2014. Research question What is the impact of foreign direct investment on economic growth in South Africa during the period 1994-2014?.
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