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MCom (Economics), North-West University, Potchefstroom Campus For an emerging economy like South Africa, increasing Foreign Direct Investment (FDI) is a possible way to increase economic growth. The goal of this study is to identify the growth impact and determinants of FDI to provide policy recommendations that can help address the problem of low economic growth through increased FDI. This study constructs an Autoregressive Distributed Lag (ARDL) and Error Correction Model (ECM) by utilising data from 1970 to 2019 to determine the contribution of FDI to economic growth. The primary regression consisted of an augmented Cobb-Douglas production function and concluded that domestic investment has a statistically significant positive effect on economic growth in both the short- and long run. Furthermore, the error correction model indicates that with time FDI has a positive and statistically significant effect on economic growth in South Africa. A secondary regression is conducted to ascertain the determinants of FDI to South Africa and finds that the market size of the country was the only variable to have a statistically significant positive effect on the inflow of FDI in the long and short run, while the exchange rate was found to be only statistically significant in the short run. Like the effect of FDI on economic growth, expenditure on education and infrastructure was found to only have a statistically significant effect on the inflow of FDI when the lagged variables were considered. The results of the Toda-Yamamoto test, show that FDI would Granger cause economic growth and domestic investment, indicating that FDI could be growth enhancing and invite further investment from domestic investors. Within the secondary regression, expenditure on infrastructure was to have a lagged positive effect on the contribution of FDI to economic growth. This Granger causality further found that South Africa would have to invest in infrastructure and education to address the skills shortages in the country. The focus of the country should also be on reducing the levels of corruption and ensuring that macroeconomic and power stability becomes the norm within the South African economy. Increasing the market size, and domestic investment within the local economy should also become a priority within the South African economy. Masters |
