I

Table of Contents

Table of  Contents  I

Table of  Figures  II

1.  Introduction  1

2.  Literature Review  1

3.  The Econometric Model and Estimation Method  5

4.  The Data  7

5.  The Results  8

5.1  Coefficient estimates  8

5.2  Statistics for hypotheses testing  9

5.2.1  t-stats  9

5.2.2  F-stats  10

5.2.3  P-values  10

5.3  Goodness-of fit measures  10

6.  Conclusions  11

  List of Sources  III

II

Table of Figures

  Fig 1: Foreign Direct Investment in selected economies  2

  Fig 2: FDI outflows from major investors to Africa by sector  3

  Fig 3: scatter diagramm of explanatory variables on FDI (Eviews)  5

1

1. Introduction

The assignment is concerned with an economic analysis of the determinants of foreign direct investment in South Africa. Foreign direct investment (FDI) is the name known to the process where a firm from a country provides capital to an existing or newly-created firm in another country. ¹ The FDI might depend on several determinants like for instance, GDP per capita, GDP growth rate per annum, ratio of gross fixed capital formation to GDP, rand-dollar exchange rate, interest rate, labour productivity index and unemployment rate. In our assignment we are taking into account five independent variables namely labour productivity non agricultural sectors, GDP per capita, rand-dollar exchange rate, total employment non agricultural and real interest rate. Foreign direct investment, especially in South Africa, may cater for economic growth.

2. Literature Review

Due to globalization more and more companies invest in other markets to remain competitive and increase their market shares. During the last four decades the figure of global playing enterprises as well as the level of foreign direct invests in the world wide economy has shown a vast increase from $ 13 billion in 1970 to $1.492 billion by the year 2000. ² That implies the importance of FDI to the world economy.

¹ Jones, J.; Wren, C. (2006). Foreign Direct Investment and the regional economy, Ashgate Publishing, p. 8

² Thomas, L.; Leape J. (2005). FDI in South Africa: the initial impact of the Trade, Development and

Cooperation Agreement between South Africa and the European Union. CREFSA, p. 2

2

Fig. 1: Foreign Direct Investment in selected economies 3

Compared to other emerging economies the FDI flow in South Africa is fairly low. Nearly all of the stated countries are showing an annual raise of FDI of approximately three percent or more over the five years of observation.

The fact that the FDI is at such a low level may be explained by several determinants. To clarify the characteristics of the FDI in South Africa, we have to consider the following issues which will lead to the determinants.

- Motivations for investment

- Mode of entry

- Sources of risk 4

First of all we have to consider the size of the local market as an impulse for investment in Southern Africa. Additionally, the appearance of natural resources like coal, steel and several other noble metals may influence the decision to invest in South Africa.

³ Thomas, L.; Leape J. (2005), p. 2

⁴ Jenkins, C; Thomas, L. (2002). Foreign Direct Investment in Southern Africa: determinants, characteristics

and implications for economic growth and poverty alleviation. Oxford/London. CSAE/CREFSA, p. 3