South African Private Investment and Economic Growth: Impact of FDI Inflows and Outflows

Abstract

Abstract This study examines the effects of foreign direct investment (FDI) inflows and outflows on domestic private investment (DPI) and economic growth in South Africa from 1980 to 2023 using an ARDL bounds testing methodology. This study includes factors that affect economic activity, such as trade openness, gross national expenditure, real effective exchange rate, and gross domestic savings, to reduce the possibility of mis-specifying the resulting equations. The findings demonstrate that FDI inflows augment domestic private investment; nonetheless, they do not facilitate sustained economic growth. In the short term, FDI inflows augment private domestic investment and stimulate economic growth. FDI inflows facilitate short-term economic expansion; yet they do not augment private local investment. The long-term outcomes of the economic growth model demonstrate that domestic savings positively impact growth, whereas the real effective exchange rate and trade openness negatively affect it. The results support initiatives designed to increase FDI inflows by fostering DPI in both the short and long term. Encouraging FDI outflows is essential because of its substantial influence on economic growth. DPI is predominantly affected by economic growth. Augmented FDI out-flows will subsequently bolster DPI by stimulating economic growth. Consequently, the enactment of policies that encourage FDI inflows and outflows will fortify the South African economy.