Econometrics Assignment

Table of Contents

Table of Figures

1. Introduction

2. Literature Review

3. The Econometric Model and Estimation Method

4. The Data

5. The Results
5.1 Coefficient estimates
5.2 Statistics for hypotheses testing
5.2.1 t-stats
5.2.2 F-stats
5.2.3 P-values
5.3 Goodness-of-fit measures

6. Conclusions

List of Sources

Table of Figures

Fig. 1: Foreign Direct Investment in selected economies

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

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

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.

illustration not visible in this excerpt

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.

illustration not visible in this excerpt

Fig. 2 : FDI outflows from major investors to Africa, by sector ^[5]

During the last decade the impression of an increase in the amount of acquisitions has been predominant, which may show an impermanent phenomenon as foreign enterprises make benefit of privatisation programmes that is reflected in foreign assets by means of acquisition.^[6]

To figure out the most common risk factors it is to mention the risk of foreign exchange as well as the characteristics of governance. To explain the foreign exchange risks it is necessary have a look at the current development of the rand which is an illustration for the instability of the exchange rate.

Furthermore, potential foreign investors are confronted with the quality of the government which covers a range of issues like, intervention in property rights, corruption and bureaucratic uncertainty.

With reference to the above mentioned determinants and characteristics of the FDI in South Africa we took into account the labour productivity of non agricultural sectors, GDP per capita, rand dollar exchange rate, total employment of non agricultural sectors and the real interest rate.

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^[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

^[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

^[5] Dupasquier, C.; Osakwe, P. N. (2005). African Trade Policy Centre Work in Progress No. 21 - Foreign Direct Investment in Africa: Performance, Challenges and Responsibilities., p. 7

^[6] Jenkins, C; Thomas, L. (2002). op. cit., p. 4