Abstract
It is important for countries to constantly look for ways to attract foreign investments, as this helps develop capital structures within the country. This study sought to investigate if foreign direct investment (FDI) affects the banking sector’s financial performance in South Africa. It also set out to understand if the COVID-19 pandemic significantly influenced the effect that FDI had on the financial performance of the banking sector.
This study used a quantitative research method to measure and quantify the research variables. A total of five South African banks were selected and the sample time frame ranged from 2007 to 2021. The dependent variable was return on equity (ROE), representing bank performance of the South African commercial banks. Represented by FDI, the independent variables were foreign equity capital, foreign intracompany loans, foreign reinvested earnings, and bank size. A dummy variable was also used to test if the COVID-19 pandemic had influenced the effect FDI had on the financial performance of banks.
Two forms of analysis were selected for this study. First, descriptive statistics and trend analysis were used to analyse the data. Secondly, a panel regression analysis was used to explore the relationship between FDI and the financial performance of banks in South Africa. The three models estimated were the pooled ordinary least squares (OLS) model, fixed effects model (FEM) and random effects model (REM), coupled with diagnostic tests such as the test for redundancy and the Hausman test. It was concluded that the FEM model was the most suitable model, whilst the REM model was deemed inappropriate to estimate for this research study due to presence of more coefficients than cross-sectional units. The analysis arrived at the following results: foreign equity capital had a significant negative effect; foreign reinvested earnings had a significant positive effect; foreign intracompany loans had an insignificant negative effect; bank size had a significant positive effect, and the COVID-19 pandemic had a significant negative effect on bank profitability in South Africa. This study concludes that FDI has an effect on bank performance in South Africa, as one independent variable was insignificant in this study. It is further concluded that the COVID-19 pandemic had a negative effect on bank performance.
Keywords
Foreign direct investment; bank performance; foreign equity capital; foreign intracompany loans; foreign reinvested earnings; bank size; COVID-19