Infrastructure and Foreign Direct Investment Inflows in South Africa: An Engle-Granger Error Correction Model Approach

Abstract

The aim of this study was to examine the impacts of infrastructure quality and infrastructure investment on foreign direct investment in South Africa over the period 1970-2015. Time series annual data on foreign direct investment, infrastructure quality, infrastructure investment, financial market development, market size, macroeconomic stability and trade openness indicators were collected from relevant sources. Unit root tests were done using Augmented Dickey-Fuller and Phillips Perron methods, while cointegration was tested using the Johansen cointegration approach. The Engle-Granger error correction model was used to compute long-run and short-run estimates of the model. Results of the first step long-run segment show that trade openness, market size and infrastructure quality had statistically significant and positive impacts on FDI inflows. Macroeconomic stability had a significant and negative impact on FDI inflows, while financial market development and infrastructure investment had insignificant and negative impacts on FDI inflows. In the short run, the error correction term shows that 50.7% of disequilibrium in FDI inflows was corrected within a period of one year. Market size, macroeconomic stability and infrastructure investment had statistically significant and negative impacts on FDI inflows into South Africa over the sample period under review. Infrastructure quality, financial development and trade openness had positive but insignificant impacts on FDI inflows into the country. The estimated model passed all the diagnostic and stability tests.

Keywords: Foreign direct investment (FDI) inflows, infrastructure quantity, infrastructure quality, Engle-Granger Error Correction Model

DOI: 10.7176/JESD/12-12-02

Publication date:June 30^th 2021