Foreign Direct Investment and Economic Growth in South Africa: A Vector Error Correction (VEC) Model Approach

Abstract

The objective of this research study was to examine the influence of foreign direct investment on economic growth in South Africa during the period 1994-2014. Time series annual data on real gross domestic product (GDP) growth, foreign direct investment, and terms of trade were sourced from the South African Reserve Bank (SARB) historical macroeconomic statistics online database. Unit root and cointegration properties of data were analysed using Augmented Dickey-Fuller and Johansen cointegration test techniques, respectively. The Vector Error Correction model was applied to compute long-run and short-run parameters of endogenous variables in the model. Results of the long-run section of the cointegrating equation show that for every 1 percent rise in foreign direct investment, there was a statistically significant rise in growth of gross domestic product by about 0.05 percentage points during the period 1994-2014. Results of the error correction component of the gross domestic product growth equation show that about 62 percent of the deviance from the long-run stability pathway was rectified in the first year after the deviation occurred. Results of the impulse response functions indicate that a one standard deviation in foreign direct investment had a statistically significant and positive effect on future gross domestic product growth after the first year.

Keywords: Foreign direct investment (FDI), gross domestic product (GDP) growth, Vector Error Correction (VEC) model

DOI: 10.7176/JESD/12-12-01

Publication date:June 30^th 2021