Foreign direct investments as a solution to South Africa’s economic growth

Abstract

Foreign Direct Investments (FDI) as a growth-enhancing component has received growing attention in the global economy and is considered a vital source of external financing for many developing economies. This study examines the impact of FDI on economic growth using a mixed research methodology. The study combines the Autoregressive Distributed Lag (ARDL) approach and interviews with experts in the field of international finance and macroeconomics. The ARDL approach was employed to estimate the long-run and short-run relationship between FDI and economic growth using annual time series data for the period 1980 to 2020. The results indicate that FDI has a positive and significant impact on economic growth in the long-run and shortrun. Furthermore, the study found that South Africa has not been able to fully exploit the potential benefits of FDI due to structural constraints such as poor infrastructure, insufficient skills and limited access to finance. This study, therefore, support the hypothesis that FDI has a significant impact on South Africa’s economic growth. Thus, policy makers can formulate policies that attracts more FDIs in the country to promote economic growth. The interviews with the experts in the field provide additional insights into the factors that influence FDI flows and their impact on economic growth. The experts highlighted that FDI has contributed significantly to the country's economic growth by creating job opportunities, promoting innovation and technological advancement, and enhancing competition in the domestic market. The findings suggest that to maximize the benefits of FDI, the government needs to create a favourable investment climate, reduce bureaucratic barriers, and address the skills gap in the workforce. Therefore, policymakers and stakeholders should take steps to promote a conducive environment for FDI to contribute positively to the country's economic growth. The study also sought to conduct an empirical investigation on the determinants of foreign direct investment in South Africa using ARDL. The results revealed the following variables that were significant determinants of FDI, government spending, market size and exchange rates. The findings from the interviews identified market size and growth, inflation, exchange rates, availability of natural resources, infrastructure, openness of the economy and availability of good infrastructure as specific determinants of FDI.This study concludes that increasing economic growth requires attention to be focused on to the fundamental determinants of foreign investments decisions and the underlying relevant microeconomic and macroeconomic outlooks. Furthermore, though there is a prime need to attract more foreign investors in South Africa, it is important to concede that attracting FDIs alone is not enough for sustainable economic growth and development. The policy makers should have holistic policies in place and undertake reforms with clear objectives and commitments.