The Impact of Foreign Direct Investment on Economic Growth and Employment in South Africa: A Time Series Analysis

Masipa Tshepo

doi:10.5901/mjss.2014.v5n25p18

Abstract

The aim of this paper was an attempt to estimate the impact of foreign direct investment on economic growth and employment in South Africa for a period of 24 years, thus from 1990 to 2013. The study employed in its analysis, the unit root test to test for stationarity of the time series, the Johansen Cointegration test to test for the existence of long-run relationship among the variables and finally, Granger causality test to establish the causal relationship between the variables. Employment and GDP were found to be stationary at first order difference, while FDI was found to be stationary at level form. The cointegration test confirmed the existence of a long-run relationship between the variables. The Granger Causality test results confirmed the direction of causality which runs from FDI to GDP and from FDI to employment. From the results, there is strong evidence that from 1990 to 2013 there was a positive long-run relationship between FDI, GDP and employment in South Africa. Adding to these tests, various diagnostic tests also confirmed that the research results are reliable. In addition, the paper also identified factors that might affect the flow of foreign investors into South Africa. These factors include; return on investment, human capital, cost of labour, labour disputes and corruption. The government should emphasise more on these factors to make South Africa conducive for foreign investment. My empirical results thus suggest that FDI should be considered as a mechanism to boost long-term economic growth and employment in South Africa. DOI: 10.5901/mjss.2014.v5n25p18

Highlights

For the past two decades, unemployment in South Africa has been one of the biggest problems facing the country
The results indicate that foreign direct investment (FDI) is stationary at the level form, implies no need to difference them at first order
This paper was an attempt to empirically establish the relationship between foreign direct investment, economic growth and employment in South Africa by employing the unit root, cointegration and granger causality test using a time series annual data within the period of 1990 to 2013

Summary

Introduction

For the past two decades, unemployment in South Africa has been one of the biggest problems facing the country. At a time when the country is struggling with such problems, a plan or a policy for a sustained growth and job creation would be warmly welcomed. With this regard, foreign direct investment (FDI) has been considered as an important source for sustained growth, increasing exports and creating jobs in developing countries. Xolani (2011) noted that FDI can benefit a country like South Africa, by supplementing domestic investment but in terms of job creation, transfer of technology, increasing domestic competition and other positive externalities that come with the attraction of foreign investors Considering all the benefits of attracting foreign investors, South Africa just like any other developing country tries as much as possible to create an environment which is conducive for attracting foreign investors. Xolani (2011) noted that FDI can benefit a country like South Africa, by supplementing domestic investment but in terms of job creation, transfer of technology, increasing domestic competition and other positive externalities that come with the attraction of foreign investors

Objectives

Methods

Results

Conclusion