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