Foreign direct investment (FDI) has of late been revered as the solution to a great deal of the
developing world’s problems. This paper seeks to examine the macroeconomic link between
foreign direct investment in South Africa, and its resultant impact on potential output. Cointegration
techniques and time-series data from 1970-2003 are utilized to construct a model suitable for policy
analysis. Policy options, through which the level of foreign direct investment inflow can be raised,
and its’ ultimate impact on output are investigated. Empirical results indicate that market size,
openness, infrastructure and nominal exchange rate are factors on which South African policy
makers should focus when seeking to attract foreign direct investment.