Abstract

The aim of this study is to empirically examine the link between Foreign Direct Investment (FDI) and Domestic Investment (DI) in South Africa over the period of 41 years (1975-2016). Accurately, it attempts to determine whether FDI crowds in or crowds out DI in South Africa. DI is sub-divided into private domestic investment (credit to the domestic private sector) and public corporation investment (state owned enterprises). We used the Autoregressive Distributed Lag-Error Correction Model (ARDL-ECM) technique to ascertain long run and short run effects concurrently after establishing that the variables were stationary (using the PP test). The results of the unit root test show that all variables are integrated of order zero I(0) or integrated of order one I(1), indicating that the series of variables are stationary in the level or first difference form. The findings revealed that variables are cointegrated in the long run. The ARDL model found a negative link between FDI and domestic investment. The result implies that FDI crowds out domestic investment. Moreover, the long-run estimate revealed that domestic investment is crowded in by government investment expenditure (GINV). Other findings indicate that, GDP crowds out private domestic investment while crowding in public corporation investment. Moreover, the long-run estimate revealed that domestic investment is crowded in by gross domestic savings (SAV). On the other hand, the real exchange rate (EXCR) crowds out private domestic investment while crowding in public corporation investment. Trade openness (TRA) crowds out domestic investment. Furthermore, the short run estimate revealed that FDI, EXCR, and TRA are crowding out private domestic investment while GINV, GDP, and SAV are crowding in private domestic investment. Other findings discovered that, in the short run, public corporation investment is crowded out by FDI, GDP, EXCR and TRA, while GINV and SAV crowd in public corporation investment.According to the CUSUM, the models are structurally stable.

Keywords: FDI, Domestic Investment, Government Investment Expenditure, Economic Growth, Real exchange rate, Gross Domestic Savings, Trade openness, ARDL-ECM Approach and South Africa