Capital Inflows and Domestic Investment in the South African Economy
Keywords:
Capital Inflows, Foreign Domestic Investment, Portfolio Investment, Domestic investment, Auto-Regressive Distributive Lag (ARDL), South Africa
Abstract
Theoretically, the effect of foreign capital inflow on the domestic economy is determined by the nature and type of the capital inflows that are attracted and the capacity of the economy to absorb these capital inflows. This study examines the impact of capital inflows on domestic investment in the South African economy from 1985 to 2018. The study employs an Auto-Regressive Distributive Lag (ARDL) to obtain a robust result. The causality test found a one-way causality between domestic investment and portfolio investment with the causation running from domestic investment to foreign portfolio investment (FPI). This was also detected between domestic investment and economic growth. However, a bi-directional bond was observed between economic growth and foreign direct investment (FDI). The study found out that foreign capital inflow does not harm domestic investment in South African but stimulates it. Also, the study found out that economic growth (GDP), FDI and FPI significantly contributed to domestic investment. The study recommended that policy should be channelled towards pursuing high economic growth in the South African economy, as this is the main factor that determines domestic investment and foreign capital inflow in the economy.
References
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Fernandez-Arias, E. Montiel, P.J. (1996). The surge in capital inflows to developing countries: an analytical overview. The World Bank economic review, 10(1), 51-77.
Ghirmay, T. (2004). Financial Development and economic growth in Sub-Saharan African Countries: Evidence from time serious analysis. African Development Review, 16(3), 415-432.
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Lewer, J. (2007). The Trade Creating Effects of Capital Flow Liberalization (with Neil Terry). International Advances in Economic Research, 9(1) 85.
Loungani, P. & Razin, A., (2001). How Beneficial is Foreign Direct Investment for Developing Countries? Finance and Development, 38(2), 254-258.
Luca, O & Spatafora, N. (2012). Capital Inflows, Financial Development, and Domestic Investment: Determinants and Inter-relationships. International Monetary Fund, Working Paper 12(120),1-23.
Lucas, R. E. (1990). Why doesn’t capital flow from rich to poor countries?” American Economic Review, 80(2), 92-96.
Mileva, E. (2008). The Impact of Capital Flows on Domestic Investment in Transition Economies. European Central Bank Working Paper Series, No 871/February.
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Odhiambo, N.M. (2008). Financial depth, savings and economic growth in Kenya: A dynamic causal relationship. Economic modelling, 25(4), 704-713.
Pagano, M. (1993). Financial markets and growth: An overview. European Economic Review, 37(23), 613-622.
Pesaran, M.H., Shin, Y & Smith, R.J. (2001). "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., 16(3), 289-326.
Quah, D. (1993). Empirical cross-section dynamics in economic growth. European Economic Review, 37(1), 2–3.
Razin, A. & Sadka, E. (2002). Labor, Capital, and Finance, International Flows. New York: Cambridge University Press, Cambridge.
Razin, A., Rubinstein, Y & Sadka, E. (2003). Which countries export FDI, and how much. NBER Working Paper no. 10145. Cambridge, Mass: National Bureau of Economic Research.
Razin, A., E. Sadka & H. Tong. (2005). Bilateral FDI flows. Threshold Barriers and Productivity Shocks. NBER Working Paper No. 11639, National Bureau of Economic Research, Cambridge, Mass.
Reinhart, C., Carmen M., Kenneth S. Rogoff, & Miguel A. Savastano. (2003). Debt Intolerance. Brookings Papers on Economic Activity, Spring, 1–74
Reisen, H. (1998). Sustainable and Excessive Current Account Deficits.Emperica,25(2), 111-131.
Romer, P.M. (1994). The origins of endogenous growth. The Journal of Economic Perspectives, 8(1), 3-22.
Shahbaz, M., Awan, R. U., & Ali, L. (2008). Bi-Directional Causality between FDI & Savings: A Case Study of Pakistan. International Research Journal of Finance and Economics, 17, 75-83.
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Tambunan, T. (2005). The impact of Foreign Direct Investment on poverty reduction: A survey of literature and a temporary finding from Indonesia. In consultative meeting on “Foreign Direct Investment and Policy Changes: Areas for New Research”, United Nations Conference Centre, Bangkok, Thailand (pp. 12-13).
UNCTAD, (2011). World Investment Report: Non-Equity Modes of International Production and Development, United Nations Conference on Trade and Development: Geneva.
Ventura, J. (2012). Bubbles and capital flows. Journal of Economic Theory, 147(2), 738-758.
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World Bank, (2011). South Africa Economic Update: Focus on Savings, Investment, and Inclusive Growth. The World Bank Group: Africa Region Poverty Reduction & Economic Management. Issue (1). 1 – 46.
World Bank. (2019). World Bank Development Indicators data base. Washington DC: World Bank.
Ajuwon, O.S. & Akotey, J.O. (2016). Effect of Macroeconomic Environment on Domestic Investment in Nigeria. Journal of Economic Policy and Analysis, Department of Economics, University of Lagos, Nigeria. 2, 215-233.
Amadou, A. (2011). The Effect of Foreign Capital on Domestic Investment in Togo. International Journal of Economics and Finance, 3(5), 223-226.
Aron, J., Leape, J. & Thomas, L. (2010). Foreign portfolio investment and capital markets in South Africa. [Online] Available: http://www.academia.edu/999128/Foreign_Portfolio_Investment_and_Capital_Markets_in_South_Africa/ Accessed: 22 July 2016.
Asafo-Adjei, A. (2007). Foreign direct investment and its importance to the economy of South Africa. Pretoria: University of South Africa.
Asiedu, E. (2002). On the determinants of FDI to developing countries: Is Africa different? World Development, 30(1), 107-119.
Bacchetta, P. (1992). Liberalization of capital movements and of the domestic financial system. Economica 59:465-74.
Bacchetta, P, & van Wincoop, E. (1998). Does exchange rate stability increase trade and capital flows? Cambridge, MA: National Bureau of Economic Research. NBER Working Paper 6704.
Bailliu, J.N. (2000). Private capital flows, financial development, and economic growth in developing countries. Bank of Canada in Canada. Working Paper, 2000-15.
Bekaert, Geert, (1995). Market integration and investment barriers in emerging equity markets, World Bank Economic Review 9, 75--107.
Bosworth, B. & Collins, S. (1999). Capital Flows to Developing Economies: Implications for savings and Investments. Brookings Papers on Economic Activity1(1), 143-169.
Bruce-Brand, A. M, (2002). Overview of Exchange Controls in South Africa: Statement to the Commission of Inquiry into the Rapid Depreciation of the Exchange Rate of the Rand, Reserve Bank of South Africa.
Burney, N. A. (1998). Determinants of Debt Problem in Pakistan and its Debt Servicing Capacity. The Pakistan Development Review, 27(4), 805-816
Caballero, R.J. & Krishnamurthy, A. (2006). Bubbles and Capital Flow Volatility: Causes and Risk Management. Journal of Monetary Economics, 53(1), 35-53.
Calvo, G., Leiderman, L., & Carmen. (1993). Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors. Staff Papers, 40(1) 108-150.
Casselli, F., Esquivel, G. & Lefort, F. (1996). Reopening the convergence debate: A look at cross-country growth empirics. Journal of Economic Growth, 1(3) 1-33.
Chamberlin, G. & Yueh, L. (2006). Macroeconomics. London: Thomson Learning. “Countries” The World Bank Economic Review, Vol. 10(1) 51-77.
Dasgupta, D & Ratha, D. (2000): What Factors Appear to Drive Private Capital Flows to Developing Countries? And How Does Official Lending Respond? World Bank Working Paper 2392.
Delechat, C., Ramirez, G., Wagh, S. &Wakeman-Linn, J. (2009). Sub-Saharan Africa’s Integration in the Global Financial Markets. IMF Working paper WP/09/114.
Eichengreen, B. (2002). Capital account liberalization: what do the cross-country studies tell us? World Bank Economic Review, 15(1), 341-366.
Fedderke, J.W. (2010). Sustainable Growth in South Africa. Economic Research Southern Africa Policy Paper No. 20, South Africa.
Fernandez-Arias, E. (1996). The new wave of private capital inflows: push or pull? Journal of Development Economics, 93(2), 389-418.
Fernandez-Arias, E. Montiel, P.J. (1996). The surge in capital inflows to developing countries: an analytical overview. The World Bank economic review, 10(1), 51-77.
Ghirmay, T. (2004). Financial Development and economic growth in Sub-Saharan African Countries: Evidence from time serious analysis. African Development Review, 16(3), 415-432.
Granger, C. (1969). Investigating causal relations by econometric models and cross-spectral methods. Econometrica, 37(3): 424-38.
Gwenhamo, F. & Fedderke, J. (2010). The Composition of Foreign Capital Stocks in South Africa: The Role of Institutions, Domestic Risk and Neighbourhood Effects. School of Economics and Economic Research Southern Africa, Working Paper No. 163. University of Cape Town.
Hecht, Y., Razin, A. & Shinar, N.G. (2004). Interactions between Capital Inflows and Domestic Investment: Israel and Developing Economies. Economic Review,2(2), 1-14.
Ibhagui, O. & Olawole, K. (2019). Capital flows and domestic investment: new evidence from OPEC countries. Journal of Financial Economic Policy, 11(4), 505-532.
Jorge, A. & Salazar-Carrillo, J. (1988). Foreign Investment, Debt and Economic Growth in Latin America. Paper delivered at the Fourth Annual Conference on Key Problems of Latin America, Florida International University. London. Macmillan Press.
Kim, S. & Yang, D.Y. (2009). Do Capital Inflows Matter to Asset Prices? The Case of Korea. Asian Economic Journal, 23(3), 323-348.
Lane, P.R. & Milesi-Ferretti, G.M. (2003). International Financial Integration. Institute for International Integration Studies Discussion Paper 03.
Lensink, R. & White, H. (1998). Does the Revival of International Private Capital Flows Mean the End of Aid? An Analysis of Developing Countries’ Access to Private Capital. World Development, 26(7), 1221-1234.
Lewer, J. (2007). The Trade Creating Effects of Capital Flow Liberalization (with Neil Terry). International Advances in Economic Research, 9(1) 85.
Loungani, P. & Razin, A., (2001). How Beneficial is Foreign Direct Investment for Developing Countries? Finance and Development, 38(2), 254-258.
Luca, O & Spatafora, N. (2012). Capital Inflows, Financial Development, and Domestic Investment: Determinants and Inter-relationships. International Monetary Fund, Working Paper 12(120),1-23.
Lucas, R. E. (1990). Why doesn’t capital flow from rich to poor countries?” American Economic Review, 80(2), 92-96.
Mileva, E. (2008). The Impact of Capital Flows on Domestic Investment in Transition Economies. European Central Bank Working Paper Series, No 871/February.
Obstfeld, M & Taylor, A. (2004). Global Capital Markets: Integration, Crisis, and Growth. Cambridge University Press, Cambridge.
Odhiambo, N.M. (2008). Financial depth, savings and economic growth in Kenya: A dynamic causal relationship. Economic modelling, 25(4), 704-713.
Pagano, M. (1993). Financial markets and growth: An overview. European Economic Review, 37(23), 613-622.
Pesaran, M.H., Shin, Y & Smith, R.J. (2001). "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., 16(3), 289-326.
Quah, D. (1993). Empirical cross-section dynamics in economic growth. European Economic Review, 37(1), 2–3.
Razin, A. & Sadka, E. (2002). Labor, Capital, and Finance, International Flows. New York: Cambridge University Press, Cambridge.
Razin, A., Rubinstein, Y & Sadka, E. (2003). Which countries export FDI, and how much. NBER Working Paper no. 10145. Cambridge, Mass: National Bureau of Economic Research.
Razin, A., E. Sadka & H. Tong. (2005). Bilateral FDI flows. Threshold Barriers and Productivity Shocks. NBER Working Paper No. 11639, National Bureau of Economic Research, Cambridge, Mass.
Reinhart, C., Carmen M., Kenneth S. Rogoff, & Miguel A. Savastano. (2003). Debt Intolerance. Brookings Papers on Economic Activity, Spring, 1–74
Reisen, H. (1998). Sustainable and Excessive Current Account Deficits.Emperica,25(2), 111-131.
Romer, P.M. (1994). The origins of endogenous growth. The Journal of Economic Perspectives, 8(1), 3-22.
Shahbaz, M., Awan, R. U., & Ali, L. (2008). Bi-Directional Causality between FDI & Savings: A Case Study of Pakistan. International Research Journal of Finance and Economics, 17, 75-83.
South African Reserved Bank, (2013). Online Statistical Query, [Online]. Available: http://www.resbank.co.za/Research/Statistics/Pages/OnlineDownloadFacility.aspx/ Accessed on the 02 August 2015.
Tambunan, T. (2005). The impact of Foreign Direct Investment on poverty reduction: A survey of literature and a temporary finding from Indonesia. In consultative meeting on “Foreign Direct Investment and Policy Changes: Areas for New Research”, United Nations Conference Centre, Bangkok, Thailand (pp. 12-13).
UNCTAD, (2011). World Investment Report: Non-Equity Modes of International Production and Development, United Nations Conference on Trade and Development: Geneva.
Ventura, J. (2012). Bubbles and capital flows. Journal of Economic Theory, 147(2), 738-758.
World Bank, (2008). The Growth Report: Strategies for Sustained Growth and Inclusive Development. The Commission on Growth and Development. World Bank: Washington, D.C.
World Bank, (2011). South Africa Economic Update: Focus on Savings, Investment, and Inclusive Growth. The World Bank Group: Africa Region Poverty Reduction & Economic Management. Issue (1). 1 – 46.
World Bank. (2019). World Bank Development Indicators data base. Washington DC: World Bank.
Published
2022-08-28
Section
Articles
