Expanding the lens on the determinants of FDI in South Africa: The impact of business confidence

Abstract

Studies have shown that foreign direct investment can contribute significantly to the economic growth of the host country. Like many other African countries, foreign direct investment inflow to South Africa has remained low over the past decade despite efforts to increase it. Among other factors, low investment levels have limited the government’s ability to address the slow economic growth rate and consequently the ever-increasing levels of unemployment and inequality. Underpinned by persisting low investment, various studies have sought to identify the determinants of foreign direct investment in South Africa, and these have mostly focused on macroeconomic factors. Expectations play a crucial role in investment decisions and expectations shape business confidence. Few studies have examined the relationship between business confidence and investment in South Africa; however, research on the relationship between business confidence and specifically foreign direct investment is limited. This study examined the relationship between the business confidence index and foreign direct investment using time series data spanning from 1972 to 2022. The autoregressive distributed lag (ARDL) model was used to analyse the long-run relationship between the business confidence index and foreign direct investment. A positive relationship between the business confidence index and foreign direct investment was found; however, it was not statistically significant, and business confidence was not found to have a significant impact on foreign direct investment. The findings indicate that other factors superior to business confidence are driving foreign direct investment into South Africa. A multifaceted approach is required to attract foreign direct investment, which will address both macroeconomic and structural factors and ensure sustainable economic growth. Future studies could investigate the relationship between business confidence and foreign direct investment in specific sectors of the economy, and alternative econometric models such as the Vector Error Correction Model are suggested.