An Investigation of the Dynamic Effect of Foreign Direct Investment (FDI) and Interest Rates on GDP in South Africa

  • Thomas Habanabakize North-West University
  • Daniel F Meyer North West University


Economic growth in South Africa has been in the “doldrums” for the past decade. If well managed, foreign direct investment (FDI) and repo rate (interest rate) could have a positive impact and assist in rapid economic growth so urgently needed in South Africa. FDI has been a driving force for growth in many developing economies. Not enough has been done to attract FDI in South Africa. The country has enormous ability and capacity to attract FDI inflows and to have the advantages from it. A quantitative research approach was used to analyse the association amongst the variables which include FDI, GDP and repo rate in the South African economy. The South African Reserve Bank database was used and the period analysed is from 2000 to 2016. Statistical and econometric methods such as correlation analysis, unit root tests, ARDL Bounds test for cointegration, an error correction model (ECM), and the Granger causality tests were used. Subsequently, after the econometric model was estimated, findings indicated the existence of a long-run relationship between the three variables. While, a significant positive relationship exists between FDI and GDP, a negative long-run relationship was found between GDP and repo rate and interestingly a nonsignificant relationship between repo rate and FDI. In the short run, the positive effect of FDI on GDP is minimal whilst a significant and positive relationship exists between GDP and repo rate. The results did also show some limitations in the results, with regards to FDI and repo rate that there is no significant relationship between the variables, meaning that repo rate does not have an impact on FDIs. Although some long-run evidence was found of FDI playing a role in economic growth in South Africa, such impact is limited. Also very interesting is that the repo rate and FDI do not have a statistically significant relationship. This could be due to the rising risks associated with investments in the country. In conclusion, there are many variables which could have a positive impact on the attraction of FDIs and such factors will be explored further in future studies. 


Download data is not yet available.


Arvanitis, A. (2002). Foreign Direct Investment in South Africa: Why has it been so low? Date of Access: 20 October 2017. ATKearney (2017). FDI Confidence Index. Date of access: 15 June 2018. Bahmani-Oskooee, M. & Brooks, T. J. (1999). Bilateral J-curve between US and her trading partners. Welt wirtscha ftliches Archive, 135(1), 156-165. Billington, N. (1999). The location of foreign direct investment: An empirical analysis. Applied Economics, 31(1), 65-78. Botha, R. (2015). Bad timing for interest rate hike. Web Access. Date of Access: 2 March 2018.
Callen, T. (2008). What is GDP? Date of Access: 22 August 2017. Chakrabarti, A. (2003). A theory of the special distribution of foreign direct investment. International Review of Economics & Finance, 12(1), 149-169. Chakrabarti, A. (2011). The determinants of foreign direct investments: Sensitivity analyses of cross‐country regressions. Kyklos, 1(2), 89-114. Cheng, L. K. & Kwan, Y. K. (2000). What are the determinants of the location of foreign direct investment? Journal of International Economics, 51(2), 379-400. Chingarande, A., Webster, D. & Karambakuwa, R. T. (2012). The impact of interest rates on FDI: a case study of Zimbabwean economy. International Journal of Management Sciences and Business Research, 1(5), 2229. Dornbusch, R., Fisher, S. & Startz, R. (2011). Macroeconomics. 11thed. New York: McGraw-Hill. Erding, A. (2010). Time Series. Date of Access: 8 November 2017. Ewe-Ghee, L. (2001). Determinants of and the relation between foreign direct investment and Growth: A summary of the recent literature. International Monetary Fund Working Paper, WP/01/175. Faroh, A. & Shen, H. (2015). Impact of interest rates on FDI: case study of Sierra Leone economy. International Journal of Business Management and Economic Research, 6(1), 124-132. Farrell, G. N. & Kahn, B. (2002). South African real interest rates in comparative perspective: theory and evidence. South African Reserve Bank, 17(1), 1-6. Gonzalez, F. (2001). Introduction to Macroeconomics and GDP definitions. Date of Access: 22 August 2017. Harmse, C. (2006). The relationship between South Africa’s macroeconomic policies and the performance of the various asset classes. Date of Access: 29 April 2018. Hogg, A. (2016). Why economic growth really, really matters. Date of Access: 2 March 2018. IMF (International Monetary Fund). (2001). Balance of Payments Statistics Yearbook. Washington DC. Jebb, A. T., Tay, L., Wang, W. & Huang, Q. (2015). Time series analysis for psychological and forecasting change. Date of Access: 20 October 2017. Jordaan, J. C. (2013). Impact of interest rate changes on South African GDP and households: a combine macroeconomic and social accounting matrix modelling approach. Southern African Business Review, 17(3), 158-160. Kamath, G. B. (2008). Impact of Foreign Direct Investment in India. ICFAI University Journal of International Business, 3(4), 35-38. Kurtishi-Kastrati, S. (2013). The effects of Foreign Direct Investment for host country’s economy. American University of the Middle East, 5(1), 26-29. Lings, K. (2017). SA economy is stuck. Date of access: 15 May 2018. Lundahl, M. & Petersson, L. (2013). Post-apartheid South Africa: an economic success story? Achieving development success: Strategies and lessons from the developing world, 232. Mahembe, E. (2014). Foreign direct investment inflows and economic growth in SADC countries. Date of Access: 20 October 2017. OECD (Organisation for Economic Cooperation and Development). (1996). Benchmark Definition of Foreign Direct Investment. 3rd edition. Paris. Pesaran, M. H., Shin, Y. & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326. Piana, V. (2005). Foreign Direct Investment. Date of access: 22 August 2017. Pritchard, J. (2015). What is the interest rate on loans or savings? Quazi, R. M. (2007). Investment climate and Foreign Direct Investment: A study of selected countries in Latin America. Global Journal of Business Research, 1 (2), 1-13.
Rouse, M. (2013). Correlation. Date of access: 8 November 2017. Samuel, C. (2013). The dark side of Foreign Direct Investment: A South African perspective. South African Institute of International Affair, 167(1), 5-7. Shatz, H. J. & Venables, A. J. (2000). The geography of International investment. The Oxford Handbook of Economic Geography, 1(2), 125-145. Siddiqui, H. A. A. (2014). Role of interest rate in attracting the FDI: Study on ASEAN 5 economy. International Journal of Technical Research and Applications, 2(3), 59-70. Singhania, M. & Gupta, A. (2011). Determinants of foreign direct investment in India. Journal of International Trade Law and Policy, 10(1), 64-82. South African Reserve Bank. (2016). Current market rates-interest rates. / Date of access: 2 March 2018. South African Reserve Bank. (2016). Gross Domestic Product. cument. Date of access: 2 October 2017. South African Reserve Bank. (2018). Statement by Monetary Policy Committee. ent%20May%202018.pdf. Date of access: 30 May 2018. Stats SA. (2018). Gross Domestic Product (GDP), First quarter 2018, Statistical release no P0441. Date of access: 20 July 2018. Tsen, W. H. (2005). The determinant of foreign direct investment in the manufacturing industry of Malaysia. Journal of Economic Cooperation, 26(2), 91-110. Tuomi, K. L. (2009). Fundamentals, Tax incentives and foreign direct investment. PhD thesis, American University, Washington DC. Ubesie, M. (2016). The Effect of Financial Sector Liberalization on Economic Growth in Nigeria. International Journal of Finance and Accounting, 5(4), 193-201. UNCTAD. (2006). World Investment Report 2006: FDI from developing and Transition Economies: Implications for development. Geneva: United Nations. Wentzel, M. S. I. & Steyn, M. (2014). Investment promotion in the South African manufacturing industry: incentive comparisons with Malaysia and Singapore. South African Journal of Economic and Management Sciences, 17(3), 6-9. World Bank. (2016). South Africa Economic Update: Promoting domestic competition between firms could help spur growth, reduce poverty. World Economic Forum. (2015). Competitiveness Ranking. Date of access: 2 March 2018. World Heritage Encyclopaedia. (2016). GDP. Date of access: 2 October 2017. Yong Ting, A. & Cheong Tang, T. (2010). The determinants of inward foreign direct investment: The case of Malaysia. International Journal of Business & Society, 1(1), 59-76.
How to Cite
HABANABAKIZE, Thomas; MEYER, Daniel F. An Investigation of the Dynamic Effect of Foreign Direct Investment (FDI) and Interest Rates on GDP in South Africa. Journal of Economics and Behavioral Studies, [S.l.], v. 10, n. 5, p. 29-37, nov. 2018. ISSN 2220-6140. Available at: <>. Date accessed: 23 mar. 2019. doi:
Research Paper