The distributional impact of foregin direct investment at the local municipal level in South Africa
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Date
2022
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Abstract
In recent years, Foreign Direct Investment (FDI) has increased substantially and has spurred the interest of researchers to determine its impact on developing economies. Studies have examined its impact on a wide array of factors including growth, poverty, and inequality. A review of empirical literature on FDI in South Africa revealed that studies did not consider the importance of the spatial interaction effect across local municipalities on FDI inflow. Hence, the study examined the distributional impact of FDI on poverty, income inequality and domestic investment in municipalities at local level in South Africa for the period 2000-2016. It employed Fixed Effects (FE) as the diagnostic tool and the baseline for comparing spatial models. Furthermore, it contributes to empirical research by using spatial regression estimations to account for spatial interactions effect across local municipalities.
Several key findings were discovered from the study. First, it finds that FDI contributes significantly to reducing poverty in local municipalities in South Africa. The study also observed the presence of spatial interactions across local municipalities when examining the impact of FDI on poverty. This indicates that FDI inflow in local municipality āiā contributes to poverty reduction in neighbouring municipalities. Second, there was no evidence of FDI impacting income inequality in municipalities at the local level. The study also finds that higher income level provinces such as Gauteng are associated with higher levels of income inequality. Lastly, the study suggests that FDI has no relationship with domestic investment at local municipal level in South Africa. This is because FDI is mainly natural-resource based and present in local regions while domestic investment is market-based and present in the urban regions of South Africa. As a result, the study also found no spatial correlation between FDI and domestic investment.
The findings of the study has significant policy implications. In order to further reduce poverty in local municipalities, policies to stimulate equal distribution of FDI across regions should be encouraged. Each municipality need to identify their local advantage to attract FDI, therefore, policy initiatives to discover and develop them would be beneficial in attracting more foreign investment. Likewise, backward, and forward linkage should be encouraged to ensure that foreign investors source their inputs locally and engage business owners in advertising and marketing their finished goods.
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A thesis submitted in partial fulfilment of the requirements for the degree of Doctor of Philosophy to the Faculty of Commerce, Law and Management, University of the Witwatersrand, 2022
Keywords
Foreign Direct Investment (FDI), Domestic investment, Income inequality