Examining spillover effects and the impact of foreign direct investment in the transport, storage and communication sector
Date
2022
Authors
Mahori, Nokwanda
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Abstract
Many studies on the relationship between foreign direct investment (FDI) and indicators of development postulate that FDI leads to economic growth through capital acquisition and diffusion of knowledge. The relationship between FDI and productivity through the generation of spillovers in developing countries remains one of the contemporary issues in international trade literature and has, in recent years, received revived interest, particularly in countries challenged with (i) high unemployment levels; (ii) knowledge and skills deficit in innovation, research and development; and (iii) in the main, lagging with technological progress. FDI benefits to the host economy are not limited to capital acquisition to counter deficiencies and creating jobs in the economy; but include the attainment of intangible assets such as knowledge, skills, managerial competencies, access to international networks, branding and goodwill. FDI presents benefits that, if not taken advantage of, could be forfeited to address capital deficiencies, revive growth, generate employment, transfer skills, and drive technological progress to boost productivity, amongst other benefits.
This study examines inward FDI in the transport, storage and communication (TSC) sector. As global economic interdependence is becoming more entrenched, the relevance of this sector and FDI cannot be understated. Leveraging efficient transport and communications networks can lead to opportunities at both the microeconomic and macroeconomic levels that could be forgone if not capitalised. These opportunities include socio-economic development, multiplier effects across different sectors, facilitating market efficiency, and delivering goods and services with more efficacy.
This paper explores the relationship between FDI and gross domestic product amongst other variables in the transport, storage and communication (TSC) sector from 1985 to 2018 in South Africa (ZA). The study applies (i) the OLS method to estimate the Cobb-Douglas (CD) production function parameters, the findings are then analysed and interpreted to draw inferences; (ii) the autoregressive distributed lag (ARDL) bounds test to cointegration is applied; and (iii) Granger causality. The OLS method is employed to determine the impact of FDI spillover effects. The bounds test establishes the long-run relationship, and the error correction model (ECM) establishes the short-run dynamic relationships. The study finds that FDI has an insignificant effect on total factor productivity (TFP) in the TSC sector. The vi ARDL bounds approach and Granger causality test indicate a bi-directional relationship between foreign direct investment (FDI) and gross domestic product (GDP). The findings of the long-run relationship, short-run dynamics, and bi-directional causality in this study are on par with the widely held perspective that FDI can positively impact GDP. Moreover, the results indicated that exports, fixed capital formation, and FDI all Granger cause GDP with evidence of reciprocity. At the 5% level of significance, imports, labour, and infrastructure do not Granger cause GDP.
This study recommends that attracting FDI is not a means to an end; since attracting FDI does not ensure that spillovers are absorbed by the domestic economy. The FDI policy framework should ideally strike the optimum balance between national socio-economic objectives and FDI policy objectives. South Africa must establish investment policies that: (i) stimulate FDI without threatening the competitiveness and viability of domestic firms; (ii) contribute to economic growth and development; (iii) adhere to established trade practices in multilateral trading systems; and (iv) develop an aggressive FDI strategy.
Description
A research report submitted in fulfilment of the requirements for the Master of Management by Research degree to the Faculty of Commerce, Law and Management, School of Governance at the University of the Witwatersrand, 2022