The effect of exchange rate and inflation on foreign direct investment and its relationship with economic growth in South Africa

Abstract

Foreign investors prefer to enter the South African market via portfolio flows. While other emerging markets are actively pursuing foreign direct investment (FDI) and taking advantage of its spillover effect, South Africa is losing out on the opportunity. South Africa is considered to be one of the most attractive investment destinations, with an abundance of natural resources, a sophisticated financial market and a relatively stable political environment. Why is South Africa trailing behind? And what are the economic factors that can influence FDI? And How can South Africa become more attractive? Linear regression analysis was done on economic data, collected from 30 countries, to determine the relationship between FDI inflow, economic growth, exchange rate and inflation. Experts in the field of macroeconomics were interviewed to gain a better understanding of these relationships and apply them in a South African context. This research found that FDI follows economic growth, but the reverse is inconclusive. Inflation has a negative impact, while the effect of exchange rate was debated. The reason for portfolio flows into South Africa was identified in the literature review, and it suggested that the success of South Africa created the preference toward portfolio flows. Copyright