A neoclassical investment function of the South African economy

Abstract

In this paper, investment is estimated to be consistent with a neoclassical supply-side model of the South African economy. In the neoclassical tradition, the model has to allow for profit-maximising or cost-minimising decision-making processes by firms, where supply-side factors such as taxes, interest rates and funding in the broader sense, play a significant role. Internal and external financial constraints have an enormous influence on South Africa's gross domestic fixed investment, as was demonstrated clearly by the vulnerability during, for example, the imposition of international sanctions against South Africa as well as during the East Asian and Russian crises. Therefore, in modelling gross domestic fixed investment for South Africa, it is necessary to incorporate the significant role played by financial constraints (internal and external) on investment.