The Opportunity Space for Foreign Direct Investments in the South African Economy

This paper investigates which economic factors determine Foreign Direct Investment (FDI) inflows in South Africa, establishes whether there is a statistical relationship or trends with foreign direct investment and factors such as financial openness, market size and growth, democracy, exchange and prime rates using time series data for the period 1970 to 2011. Though multivariate regression models were employed, this paper finds that financial openness (Kaopen index), democracy, one year lagged FDI and market size (GDP per capita) were significant in influencing FDI. GDP per capita had by far, the highest magnitude influencing FDI inflows in South Africa. This paper also compares South Africa with similar countries in terms of attracting FDI. Theoretical evidence showed that cheap labor and training of the labor force attracted higher FDI in the Chinese economy whereas this was not the case for South Africa. Other differences can ultimately be attributed to the start of democracy in South Africa