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Growth impact and determinants of foreign direct investment into South Africa, 1956-2003

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  • Fedderke, J.W.
  • Romm, A.T.

Abstract

The paper is concerned with the growth impact and the determinants of foreign direct investment in South Africa. Estimation is in terms of a standard spill-over model of investment, and in terms of a new model of locational choice in FDI between domestic and foreign alternatives. We find complementarity of foreign and domestic capital in the long run, implying a positive technological spill-over from foreign to domestic capital. While there is a crowd-out of domestic investment from foreign direct investment, this impact is restricted to the short run. Further we find that foreign direct investment in South Africa has tended to be capital intensive, suggesting that foreign direct investment has been horizontal rather than vertical. Determinants of foreign direct investment in South Africa lie in the net rate of return, as well as the risk profile of the foreign direct investment liabilities. Policy handles are both direct and powerful. Reducing political risk, ensuring property rights, most importantly bolstering growth in the market size, as well as wage moderation, lowering corporate tax rates, and ensuring full integration of the South African economy into the world economy all follow as policy prescriptions from our empirical findings.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 23 (2006)
Issue (Month): 5 (September)
Pages: 738-760

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Handle: RePEc:eee:ecmode:v:23:y:2006:i:5:p:738-760

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Web page: http://www.elsevier.com/locate/inca/30411

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Citations

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Cited by:
  1. John C. Anyanwu, 2012. "Why Does Foreign Direct Investment Go Where It Goes?: New Evidence From African Countries," Annals of Economics and Finance, Society for AEF, vol. 13(2), pages 425-462, November.
  2. Farayi Gwenhamo & Johannes Fedderke, 2010. "The Composition of Foreign Capital Stocks in South Africa: The Role of Institutions, Domestic Risk and Neighbourhood Effects," Working Papers 163, Economic Research Southern Africa.
  3. Fedderke, Johannes W. & Bogetic & Zeljko, 2006. "Infrastructure and growth in South Africa : direct and indirect productivity impacts of 19 infrastructure measures," Policy Research Working Paper Series 3989, The World Bank.
  4. Janine Aron & Tania Ajam, 2007. "Fiscal Renaissance in a Democratic South Africa," Economics Series Working Papers WPS/2007-10, University of Oxford, Department of Economics.
  5. Beugelsdijk, Sjoerd & Smeets, Roger & Zwinkels, Remco, 2008. "The impact of horizontal and vertical FDI on host's country economic growth," International Business Review, Elsevier, vol. 17(4), pages 452-472, August.
  6. Faisal Ahmed & Rabah Arezki & Norbert Funke, 2007. "The composition of capital flows to South Africa," Journal of International Development, John Wiley & Sons, Ltd., vol. 19(2), pages 275-294.

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