Assessment of Foreign Direct Investment-Led Growth Argument in South Africa Amidst Urbanization and Industrialization: Evidence from Innovation Accounting Tests

Abstract

The objective of this study is to investigate the FDI-led growth hypothesis for the case of South Africa for the period between 1970 and 2017. The preliminary analysis of unit root test using traditional methods shows a different order of integration, which necessitates the use of autoregressive distributive lag (ARDL) methodology. Additionally, the current study also leverages on the innovative accounting techniques which comprised of impulse response function and forecast error variance decomposition (FEVD), which are employed to explore the responsiveness of the variables on each other. Our study results show that FDI inflow exerts a very strong positive impact on economic growth, thus validating the FDI-induced growth nexus in the South African economy. Furthermore, causality results show a one-way link running only from FDI inflow to economic growth and a unidirectional connection from urbanization to FDI inflow. The implication is that only urbanization matters in attracting FDI inflow to South Africa. These outcomes suggest that there is a need for the government administrators to develop urban centers through improving infrastructure facilities and the provision of industrial zones as a way of expanding both the ready market and the absorptive capacity of the country.