The determinants of foreign direct investment inflows in South Africa

Abstract

This study attempts to identify the determinants of FDI inflows into South Africa using annual data for the period from 1980 to 2012. Firstly, it provides an overview of FDI and the state of macroeconomic variables in South Africa. Secondly, it provides a review of the literature, both theoretical and empirical, on the proposed factors that determine FDI inflows. Based on the empirical literature review, The Johnsen cointegration method was chosen to analyse the long-term relationship between the variables of interest which is a VAR based model. The empirical results revealed that there is a long-term relationship between FDI and its determinants as specified in the study. The Vector Error Correction Model was estimated to analyse both the short-run and long-run determinants of FDI inflows. The empirical results revealed that GDP, Openness, inflation, exchange rate, corporate tax and a measure of financial crisis are important determinants of FDI inflows into South Africa. The Granger Causality was estimated to analyse if there is a causal relationship between FDI and other variables such as GDP, the results revealed that there is a uni-directional causality from GDP to FDI. These results were consistent with the long-run cointegrating vector. This suggests that authorities need to take into account factors which hamper the growth of the economy given its importance to attracting FDI inflows. In addition, the financial crisis variable was found to be negative and significant in determining the flow of FDI into the country. This point out that factors beyond the country’s boarder have a large bearing on the flow of FDI into the country. This in part questions the sustainability of foreign capital as a form of development finance given in the face of a crisis it diminishes.