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


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.


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