Evaluating the <i>impact of foreign direct investment on economic growth in developing economies</i>: Evidence from South Africa (2000–2023)

Abstract

This study examines the impact of Foreign Direct Investment (FDI) on economic growth in South Africa over the period 2000 to 2023. An Ordinary Least Squares (OLS) regression model was employed to assess the relationship between FDI inflows and Gross Domestic Product (GDP), while controlling for key macroeconomic variables. The findings reveal that FDI exerts a significant positive influence on economic performance, with a 1% increase in FDI inflows associated with a 1.93% rise in GDP. However, high inflation exerts a detrimental effect, with a coefficient of -1.99, highlighting the importance of macroeconomic stability. The analysis also indicates that trade openness contributes positively to economic growth, while political risk remains a substantial deterrent to investment, as shown by a coefficient of -3.11. These findings underline the importance of maintaining a stable political environment, managing inflation effectively, and enhancing trade liberalisation to maximise the benefits of FDI. Policy recommendations include strengthening regulatory frameworks and fostering trade openness.

Keywords: {'name': 'Foreign Direct Investment, economic growth, South Africa, Gross Domestic Product, inflation, trade openness, political risk, sustainable development'}

Authors & affiliations

Elvis Madondo
Durban University of Technology

Hummerly Dhobha
Durban University of Technology

Primrose Mutema
Universitas Islam International Indonesia

Eunice Akindeji
Durban University of Technology

Deposited references

Supplied references, not a list of publications citing this article.

Adamu, M. A., & Nggada, H. M. (2024). Impact of foreign direct investment inflow on economic growth of Sub-Saharan African countries. Journal of Economics and Allied Research, 9(2), 360–372.

DOI: 10.1016/j.intfin.2014.02.003

DOI: 10.7763/JOEBM.2015.V3.221

DOI: 10.1016/j.renene.2019.06.054

Ayanwale, A. (2007). FDI and economic growth in Nigeria: Evidence of Nigeria (AERC Research Paper No. 165). African Economic Research Consortium.

DOI: 10.1002/jid.1031

DOI: 10.1596/1813-9450-10422

DOI: 10.1007/s00181-016-1097-1

DOI: 10.3390/economies12110296

DOI: 10.3390/economies13060157

DOI: 10.1596/1813-9450-8774

Dondashe, N., & Phiri, A. (2018). Determinants of foreign direct investment in South Africa: Do macroeconomic variables matter? (MPRA Working Paper No. 8363).

DOI: 10.1080/19186444.2022.2146967

Emmanuel, I. J. (2016). Effect of foreign direct investment on economic growth in Nigeria. European Business and Management, 2(2), 40–46.

DOI: 10.11114/aef.v3i4.1691

DOI: 10.54560/jracr.v14i3.505

Keho, Y. (2015). Foreign direct investment, exports and economic growth: Some African evidence. Journal of Applied Economics & Business Research, 5(4).

DOI: 10.1016/j.frl.2020.101488

Louzi, B. M., & Abadi, A. (2011). The effect of foreign direct investment on economic growth. IJRAAS Journal of Economics, 8, 2–16.

DOI: 10.47743/saeb-2025-0009

Mathebula, S. R., Dagume, A. M., & Khangale, R. A. (2024). The impact of foreign direct investment on economic growth: Evidence for South Africa. Journal of Smart Economic Growth, 9(1).

Matjekana, K., & Masipa, T. (2015). Does foreign direct investment and exports translate to economic growth and job creation in South Africa? SI: ESSA.

Mbeki, M. (2016). The effect of foreign direct investment on economic growth in South Africa (MPhil thesis). Nelson Mandela Metropolitan University.

DOI: 10.15208/beh.2018.54

DOI: 10.1111/j.1574-0862.2010.00440.x

Mokoena, T. (2025). The influence of political stability on foreign direct investment inflows. Business and Economics Journal, 16, 533.

Morgan, S., Jarrad, C., & Michael, E. (2022). Foreign direct investment in Africa: Recent trends leading up to African Continental Free Trade Area (No. EIB-242). U.S. Department of Agriculture, Economic Research Service.

DOI: 10.11648/j.ijefm.20130106.19

Mugowo, O. (2017). Foreign direct investment and economic growth in SADC countries: A panel data analysis (MCom thesis). University of Venda.

DOI: 10.2478/eoik-2025-0051

Organisation for Economic Co-operation and Development. (2008). OECD benchmark definition of FDI (4th ed.). OECD Publishing.

DOI: 10.1016/j.econmod.2020.07.009

DOI: 10.31039/jomeino.2021.5.1.2

DOI: 10.18775/ijied.1849-7551-7020.2015.45.2003

Suleiman, N., Kaliappan, S., & Ismail, N. (2013). Foreign direct investment and economic growth: Empirical evidence from Southern Africa Customs Union (SACU). Journal of Management and Economics, 7(1), 36–149.

Tafirenyika, S. (2016). FDI and economic growth: ARDL and causality analysis for South Africa. MPRA Paper No. 72382.

DOI: 10.1108/JED-08-2020-0108

United Nations Conference on Trade and Development. (2023). Thirtieth report on G20 investment measures. UNCTAD.

DOI: 10.18488/29.v10i3.3519

DOI: 10.58970/IJSB.2450

Wooldridge, J. (2016). Introductory econometrics: A modern approach. Nelson Education.