FDI Inflows and Economic Growth in South Africa from 1994 to 2013

Abstract: Since the beginning of democracy the South African government has been increasingly trying to attract FDI into the country. South Africa is an interesting case, since despite being a middle income country and highly developed compared to other African countries, FDI does not seem to offer positive spill-over effects. This paper critically assesses existing theory on the nexus between FDI, absorptive capacity and economic growth. A time series analysis from 1994 to 2013 is conducted, applying data from the World Bank and Penn World Table databases. The empirical findings show significant ambiguity, as no long-term effects between the variables are found, while economic growth is only affected by FDI in the short-term. In contrast to theory, according to the findings a relatively high level of individual factors´ absorptive capacity does not seem to be sufficient to generate overall economic gains and development. This, first of all is due to high populations group inequality through past-depending institutions and labor markets, still inheriting apartheid´s dynamics. Secondly, the capital intensive mining sector receives the main share of FDI in the economy. This promotes rather extractive exports than an inclusive economic development. Weak linkages between other, more labor intensive, sectors discourage employment creation and investments in human capital.