Impact of Foreign Direct Investment and Domestic Investment on economic growth in South Africa: A time series analysis

Abstract

Since post-apartheid, South Africa has made great strides in increasing its investment through foreign cash inflows and domestic investment. This research tries to establish the effects of Foreign Direct Investment (FDI) and domestic investment on economic growth in South Africa. Guided by the unit root test results, this study uses the Autoregressive Distributed Lag (ARDL) cointegration technique and the vector error correlation model to investigate the effect of FDI and domestic investment on economic growth in South Africa from 1990-2019. To assess the validity of a model used, a number of diagnostic tests were conducted, including heteroskedasticity, multicollinearity and normality tests. The study found a statistically significant positive long-run relationship between domestic investment and economic growth. Conversely, the study found a negative relationship that is not statistically significant between FDI and economic growth. This finding is in line with a number of studies, including those conducted in South Africa. Possibly due to high levels of unemployment in South Africa, the study found a negative relationship between population growth and economic growth. The study concludes that policymakers should implement investment policies and promote strategies that will reduce linkages in investment to foster and promote job creation, political and social stability, and sustainability in encouraging economic growth.

Keywords: Foreign Direct Investment, domestic investment, economic growth, population growth, South Africa