The exploration of FDI dynamics and economic growth in the context of South Africa.

Abstract

The relationship between Foreign Direct Investment (FDI) and economic growth has been the subject of extensive theoretical and empirical inquiry. While FDI is widely viewed as a potential catalyst for economic development through capital inflows, technolog ical spillovers, and productivity enhancements, the strength and direction of this relationship remain context dependent. In South Africa, a country characterized by structural inequalities, economic volatility, and a highly concentrated investment landscape, the role of FDI in stimulating sustained growth warrants closer examination. This study investigates the dynamic interrelationship between FDI and key macroeconomic variables-GDP, trade openness, real effective exchange rate, and household consumption-in South Africa over the period 1990Q1 to 2022Q4. Using a Bayesian Vector Autoregression (BVAR) framework, the analysis accounts for the complex, interdependent nature of macroeconomic interactions under conditions of limited sample size and parameter uncertainty. Impulse Response Functions (IRFs) are employed to evaluate the short- to medium-term effects of shocks to FDI on the broader economy. The results indicate that FDI shocks in South Africa exert limited and statistically weak effects on GDP, trade, exchange rates, and consumption. Forecast Error Variance Decomposition (FEVD) further confirms that FDI contributes marginally to explaining fluctuations in macroeconomic aggregates, with only a small and gradually increasing influence on GDP. These findings suggest that while FDI has some positive association with growth, it does not act as a dominant driver of macroeconomic performance. Consequently, policy strategies should focus not only on attracting FDI but also on improving domestic absorptive capacity, enhancing trade integration, and ensuring that investment inflows align with inclusive and sustainable development goals.