Summary of the study

The main objective of this study was to examine the causal relationship between FDI inflows and economic growth in SADC countries. The study also investigated whether Granger causality was dependent on the country’s level of income. In order to meet these two broad objectives, the study investigated the dynamics of FDI and GDP in SADC countries over the period 1980-2012; explored both theoretical and empirical research on the causal relationship between FDI and economic growth; and used the recently developed panel-data analysis methods to examine this causal relationship. This section offers a summary of the main findings per chapter, except empirical findings which are discussed separately in Section 6.3.

The study noted that global FDI inflows have grown from US$50 billion in the early 1980s to US$1.5 trillion by 2011, although they fell by 18 per cent to $1.35 trillion in 2012. Africa and the SADC have also witnessed substantial increases in FDI inflows. For SADC, FDI inflows have grown by almost fifty times the original investment in the last three decades; from a mere US$372 million in 1980 to US$17 billion in 2008. Although FDI inflows to SADC decreased to US$7 billion in 2010, there are signs of recovery, as 2011 recorded a 38% increase to US$10 billion.

In Chapter 2, the case study approach was employed to analyse the policies and strategies used by individual countries to attract FDI and boost economic growth. The findings of this study show that in the 1980s and early 1990s most SADC countries were still coming out of colonialism; and hence their policies were mainly focused on import substitution, socialism and command economies, with strong emphasis on the protection of infant industries. In particular, the governments of some of these countries were very active in the market through State-owned enterprises (SOEs), especially in ‘strategic sectors’, such as telecommunication, agriculture and mining. Most of these policies had a somewhat negative effect on FDI inflows which were thus fairly low during the first two decades. FDI into SADC started peaking in the late 1990s, as governments embarked on privatisation, liberalisation and economic structural-adjustment

programmes. These reforms saw the warming up of countries to MNCs, and the setting up of investment- promotion agencies. Some of the policies that were implemented by these countries include: i) The deregulation of the economy; ii) the relaxation of exchange controls; iii) the adoption of 'market-friendly' policies, such as privatisation and trade liberalisation; iv) the protection of foreign investments; v) political stability; and vi) participation in multilateral and bilateral trade and investment agreements. In recent years, some of these countries introduced special economic zones that offer further incentives to investors in ‘strategic industries’ such as manufacturing, tourism and oil exploration. It is also worth noting that countries, such as South Africa, Zambia etc., that pursued the privatisation of State-owned enterprises, recorded a significant increase in FDI inflows and economic growth.

Notwithstanding a remarkable increase in FDI inflows in recent years in these countries, there were still a number of challenges faced by some of these countries which include, inter alia, civil wars, social unrest and political strife which ravaged some of these economies during the 1990s and the early 2000s. Some of the constraints currently facing FDI inflows into these SADC countries include political instability (including civil wars), policy uncertainty, poor infrastructure, and difficulties in doing business.

Chapter 3 surveyed theoretical and empirical literature on the effect and causal relationship between FDI and economic growth. The theoretical investigation showed that FDI is a key contributor to the economic growth of the host country. Through both exogenous and endogenous growth analysis, it was noted that FDI contributes directly and indirectly to economic growth, and that host country’s growth may attract more FDI. It was also observed that FDI affects economic growth through two broad channels: (i) FDI can encourage the adoption of new technologies in the production process through technological spillovers, and (ii) FDI may stimulate knowledge transfers, both in terms of labour training and skill acquisition and by introducing alternative management practices and better organisational arrangements; commonly referred to as spillovers. It was also further noted that (i) the impact of FDI on economic growth can be positive or negative, depending on channel or impact mechanism, and (ii) the impact of FDI on host country economic growth is dependent on the economic and technological conditions in the host country itself, such as level of human capital, the trading system, the degree of openness of the economy, investment policies and legislation and political stability. A review of empirical literature showed that a causal relationship and link between FDI and GDP could be in the form of growth-driven FDI (GDP causing FDI), FDI-led growth (FDI causing GDP) and/or feedback (bi-directional causality).

Most of the studies proved that high economic growth rates were correlated with high investment rates, but the results on causality were mixed and inconclusive. The majority of the studies showed evidence of unidirectional causality from FDI to economic growth, while some found bi-directional causality.

Chapter 4 presents the recently developed panel data analysis methods, which include panel unit root tests, panel cointegration tests and panel Granger causality tests. The chapter discussed two main methods of performing Granger causality tests (i) the VAR model, which is applicable for stationary data where there is no cointegration and (ii) the ECM for co-integrated variables. An argument is made that if the variables are not co-integrated, Granger causality can still be tested using a VAR model and if co-integrated, an ECM framework is used.

Empirical results are summarised below.