South African Reserve Bank working paper finds foreign direct investment supports sectoral performance with debt instruments showing stronger links than equity

The South African Reserve Bank published a Working Paper assessing how foreign capital flows relate to South Africa’s economic performance. The paper finds limited evidence that foreign direct investment (FDI) or foreign portfolio investment (FPI) materially affect aggregate outcomes, but reports clear positive and statistically significant long-run relationships between FDI and economic performance indicators at the sectoral level, with debt instruments showing stronger associations than equity. At the aggregate level, the analysis using quarterly data from 1990Q1 to 2024Q3 finds no statistically significant long-run effects of FDI or FPI on the saving-to-GDP ratio, gross capital formation-to-GDP ratio, GDP, or non-agricultural employment, while identifying short-run positive effects of FDI on labour productivity that do not persist. A sectoral panel analysis using annual data from 2001 to 2023 across nine sectors finds that total direct investment is positively related to gross value added, fixed capital stock, gross fixed capital formation, gross operating surplus, employment and compensation of employees, with debt-financed investment typically carrying larger estimated long-run coefficients than equity; for some outcomes, the relationship strengthens after 2021. Granger causality tests indicate two-way causality between foreign investment and most sectoral performance measures, while employment appears to attract foreign investment but is not directly influenced by it. The paper suggests that the design of capital flow management policies should take account of sectoral impacts of direct investment and the differing roles of debt and equity instruments, in the context of South Africa’s ongoing move from exchange controls toward a capital flow management framework.