The relationship between foreign direct investment and economic growth in South Africa: Vector error correction analysis

Abstract

Orientation: From the Growth, Employment and Redistribution (GEAR) strategy of 1996 to the currently implemented National Development Plan (NDP), the need to attract more foreign investors and promote exports in pursuit of economic growth and job creation has been emphasised.

Research purpose: It is within this context that the purpose of this article was to determine the nexus between foreign direct investment (FDI) inflows and economic growth from 1980 to 2014.

Research design, approach and method: The vector error correction model is employed to determine and estimate the long-run relationship between the variables in the model.

Main findings: From the findings, it was found that economic growth shares a positive relationship with both FDIs and the real effective exchange rate, while sharing a negative long-run relationship with government expenditure.

Practical and managerial implications: The article contributes towards the on going debates on the impact of FDIs on economic growth and job creation in the recipient countries. Accordingly, its findings reinforce the importance of attracting FDIs in South Africa and to what extent they affect economic growth and employment.

Contribution or value-add: From a policy perspective, the attraction of foreign investors must target sources that can create jobs and boost the South African economy. It is vital for the government to strengthen its machinery to fight corruption to create an environment conducive for foreign investors. Hence, this article suggests that South Africa’s capacity to grow and create jobs also depends on the country’s performance to enhance gross domestic product growth and attract more FDIs. The attraction of FDIs should, however, not be seen as an end in itself but also as a means of supporting other initiatives such as eradicating poverty and inequalities in South Africa.