Abstract
This paper investigates the impact of fiscal policy on foreign direct investment (PDI) in South Africa during the past 30 years. Casual empirical analysis reveals a definite linkage between FDI flows and variables such as the deficit/GDP ratio, representing fiscal discipline, and the tax burden on foreign investors. This relationship is substantiated by econometric analysis. Given the economy's large degree of dependence on foreign capital, the government may contribute to an investor-friendly environment by adjusting fiscal policy. Some inroads have been made in this regard with the government's Medium-term Expenditure Framework (MTEF), which projects a policy of strict fiscal discipline in years to come. However, the tax burden is still relatively high and, due to its impact on foreign direct capital flows, requires urgent attention.
Highlights
The growing rate of global economic integration has a profound impact on economic policy - especially fiscal policy
To determine the influence of the tax rate on foreign direct investment in South Africa, the absolute value of corporate tax in South Africa and the United Kingdom is expressed as a ratio to the respective countries' GOP, with a series consisting of the differential between the two ratios
Should it contribute to increased domestic saving to finance the required level of investment, but due account should be taken of the way in which fiscal policy influences the net flow of foreign direct investment
Summary
The growing rate of global economic integration has a profound impact on economic policy - especially fiscal policy. According to pure economic theory, free capital flows improve global resource allocation and transfer of technology. It could result in speculative runs on currencies, destabilising the macroeconomic framework and imposing adjustments on the fiscus, with detrimental consequences for the socio-economic environment. The Iiberalisation of international capital movements was precipitated by a major change in the perception of the role and scope of government in the economy during the last two decades (Guitiim, 1999: 26). Strong markets developed in the international economy as a result of deliberate policy initiatives to liberalise capital movements. These in turn, tightened the links between national economies, with additional effects on fiscal and other policies
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