Determinants of foreign direct investment in South Africa

18 Dec 2020

Many developing countries across the world have been on a quest to attract foreign direct investment which is considered a significant component for ensuring economic growth, development and employment creation. The South African government has developed, and designed policies for attracting foreign direct investment (FDI) inflows into the country; however, these they have not borne enough fruits since FDI inflows are still below the expected level. Therefore, the study aimed to investigate various determinants of FDI in South Africa. The study employed the Autoregressive Distributive Lag (ARDL) methodology using yearly secondary data from 1980 to 2018. The bounds test for cointegration was utilised to check the association and link among the variables used in the study in the long-term. In the FDI series a long-term relationship was revealed by ARDL bounds test results. The ARDL results showed that determinants had different impact on FDI. In summary, government expenditure, economic infrastructure and economic growth are significant strong long-term determinants of FDI. However, inflation yielded negative significant effects on FDI. All the models estimated indicated negative and significant error correction term implying that disequilibrium in the current year in the model would be corrected in the subsequent years. It can be recommended that the South African government should prioritize its government expenditure and growing economy with a view of attracting FDI inflows into the economy. While reprioritizing its government expenditure and economic growth, it should focus more on improving infrastructure to attract foreign direct investment by reducing the cost of doing business in the country. All this should be done in an economy that puts its inflation under control, as it could be seen that the lesser the inflation rate the more the country can attract foreign investors. Keywords: Autoregressive Distributive Lags (ARDL), Foreign direct investment, Economic infrastructure, Economic growth Government expenditure, Inflation