Infrastructure and Foreign Direct Investment Inflows in South Africa: An Engle-Granger Error Correction Model Approach

Allexander Muzenda ,Bongani J Mwale ,Thebogo Portia Percians Mange ,Maphefo Anno-Frempong

doi:10.7176/jesd/12-12-02

Abstract

The aim of this study was to examine the impacts of infrastructure quality and infrastructure investment on foreign direct investment in South Africa over the period 1970-2015. Time series annual data on foreign direct investment, infrastructure quality, infrastructure investment, financial market development, market size, macroeconomic stability and trade openness indicators were collected from relevant sources. Unit root tests were done using Augmented Dickey-Fuller and Phillips Perron methods, while cointegration was tested using the Johansen cointegration approach. The Engle-Granger error correction model was used to compute long-run and short-run estimates of the model. Results of the first step long-run segment show that trade openness, market size and infrastructure quality had statistically significant and positive impacts on FDI inflows. Macroeconomic stability had a significant and negative impact on FDI inflows, while financial market development and infrastructure investment had insignificant and negative impacts on FDI inflows. In the short run, the error correction term shows that 50.7% of disequilibrium in FDI inflows was corrected within a period of one year. Market size, macroeconomic stability and infrastructure investment had statistically significant and negative impacts on FDI inflows into South Africa over the sample period under review. Infrastructure quality, financial development and trade openness had positive but insignificant impacts on FDI inflows into the country. The estimated model passed all the diagnostic and stability tests. Keywords: Foreign direct investment (FDI) inflows, infrastructure quantity, infrastructure quality, Engle-Granger Error Correction Model DOI: 10.7176/JESD/12-12-02 Publication date: June 30 th 2021

Highlights

The globalization of the world economy has created new ample opportunities for attraction of foreign direct investment (FDI) in developing and emerging economies (Musa & Ibrahim, 2014)
Since FDI primarily occurs through multinational corporations (MNCs), FDI flows across countries are regarded to be a reason for the existence of market imperfections (Nayak & Choudhury, 2014)
These tests were done to determine the order of integration of each variable, namely FDI inflows, financial market development, infrastructure investment, infrastructure quality, market size, macroeconomic stability and trade openness

Summary

Introduction

The globalization of the world economy has created new ample opportunities for attraction of foreign direct investment (FDI) in developing and emerging economies (Musa & Ibrahim, 2014). Countries that have the potential to provide business support to investors have higher prospects of participating in the global economy (Suny Levin Institute, 2016). Some countries formulate their labour market and macroeconomic policies and legal structures in a manner that accommodates the interests of foreign investors and attract foreign direct capital inflows (Roelfsema & Zhang, 2012). The key theories of FDI are based on three assumptions of market structures, namely perfect competition, imperfect competition, and currency-based or exchange rate conditions (Nayak & Choudhury, 2014). The perfect competition-based theory of FDI is anchored on the assumption of free movement or flow of capital from the investing or home country to the recipient or country. Past studies found that due to FDIs, the output of the investing country decrease without leading to a drop in national income of the nation (Nayak & Choudhury, 2014)

Objectives

Methods

Results

Conclusion