The impact of foreign direct investment on economic growth in South Africa

Abstract

Numerous investigations have explored the impact of foreign direct investment (FDI) on economic growth, yielding a landscape of contrasting findings. This paper aimed to investigate the impact of FDI on economic growth in South Africa from 1994Q1 to 2023 Q4 employing secondary time series data. The practical importance of this study lies in its ability to inform policymakers about the critical relationship between FDI and economic growth, emphasizing the need to create a conducive environment that attracts and retains investment, thereby fostering sustained economic growth. To ensure the data's stationarity, both the Phillips-Perron (PP) and Augmented Dickey-Fuller (ADF) tests were applied. The analysis utilized the Autoregressive Distributed Lag (ARDL) model to examine dynamic relationships between variables in both the short run and long run. An ARDL bounds test for cointegration was conducted to explore the longterm relationships, and a Granger causality test was used to determine causal relationships. The ARDL bounds test confirmed a long-term relationship among the FDI and economic growth. However, the Granger causality test indicated no causal link between economic growth and FDI, suggesting that changes in economic growth do not predict changes in FDI. This study contributes to the literature by underscoring the importance of stable economic environments and infrastructure development to maximize the benefits of FDI, with future research needed to explore additional factors influencing this dynamic.