The Composition of Foreign capital Stocks in South Africa: The Role of Institutions and Domestic Risk

This paper investigates the determinants of the absolute volumes and composition of foreign capital stocks in South Africa. The paper focuses on the role played by institutional quality (property rights), domestic risk and neighbourhood e¤ects as potential determinants. The empirical \u85ndings show that secure property rights and low risk in the host country positively a¤ect the absolute volumes of both long-term and short-term foreign capital but tilt the composition of foreign capital in favour of long-term foreign capital. More importantly, the results demonstrate the existence of neighbourhood e¤ects where the institutional environment in Zimbabwe has a signi\u85cant impact on South Africas foreign capital inows. Interestingly, it is shown that weak property rights in Zimbabwe lead to an increase in South Africas foreign direct Investment (FDI) but a reduction in South Africas portfolio investment. This outcome suggests that while South Africa and Zimbabwe compete for long-term foreign capital, the two countries should cooperate with each other in ensuring a sound institutional environment conducive to all forms of foreign capital