The Contribution of Foreign Direct Investment (FDI) To Domestic Employment Levels in South Africa: A Vector Autoregressive Approach

Several empirical works have yielded mixed and controversial results with regard to the effects of FDI on employment and economic growth. The primary focus of this study is to investigate the contribution of FDI to domestic employment levels in the context of the South African economy. The analyses of the study were carried out using the annual time series data from 1980 to 2015. The macroeconomic variables employed in the empirical investigation include employment, FDI, GDP, inflation, trade openness and unit labour costs. The study used secondary data from the South African Reserve Bank and Statistics South Africa database. The study estimated a Vector Autoregressive/ Vector Error Correction Mechanism (VAR/VECM) approach to conduct empirical analysis. However, the study also employed single equation estimation techniques, including the Ordinary Least Squares (OLS), Fully Modified Ordinary Least Squares (FMOLS), Dynamic Ordinary Least Squares (DOLS) and Canonical Cointegrating Regression (CCR) models as supporting tools to verify the VAR/VECM results. This study provides strong evidence of a significant negative relationship between FDI and employment levels in the South African economy. Empirical analysis of the study suggests that the effect of economic growth on employment is highly positive and significant in South Africa’s economy. The study recommends that policymakers ought to invest more in productive sectors that aim to promote economic growth and development to boost employment opportunities in South Africa.