Abstract
South Africa is faced with a growing unemployment problem, with unemployment reaching 29 percent in the second quarter of 2019. At the same time the government budget deficit has been widened, as is evident by the increase from R23 billion in 2008/09 to R210.2 billion in 2018/19 and government has consistently increased spending to address service delivery. Given this challenge of not having sufficient financial resources to fund the country’s development needs, the country has identified FDI inflows as the key driver to supplement fiscal resources. During the early 2000s, South Africa was the most attractive destination for FDI inflows relative to other African countries. The factors that constitute the conductive environment in the early 2000s includes a good legal framework for business, stable macroeconomic policy following the adoption of GEAR in 1996 and good infrastructure built over the years as well as political certainty. Over the years, the country’s infrastructural comparative advantage has declined; the railway network is deteriorating and the country’s road maintenance backlog is growing. Previous researchers have established that investors’ decision to invest is influenced by the returns on investments. The empirical literature has also established that well-functioning infrastructure is associated with low costs of doing business, which will increase returns. Therefore, the theoretical and empirical literature has established that infrastructure is vital for a country to attract FDI inflows. Given the literature findings and South Africa’s long-term planned (NDP) target of an investment ratio of 30 percent of GDP by 2030, this study sought to examine whether infrastructure is indeed important in determining FDI inflows into South Africa. Secondary time series data for the period 1980 to 2015 was sourced on FDI inflows, railway length, energy consumption, cellular phone subscription, GDP per capita and trade openness. The study made use of the Johansen co-integration test and regression model. The results indicate that all the independent variables have a positive relationship with FDI inflows. However, only energy consumption and cellular phone subscription are significant at the 10 percent significance level while trade openness is significant at the 1 percent significance level. Based on the results, a 1 percent increase in energy consumption will increase FDI inflows by 6.3 percent; a 1 percent increase in mobile cellular phone subscription will increase FDI inflows by 0.25 percent and a 1 percent increase in the sum of trade as a percentage of GDP will lead to a 3.3 percent increase in FDI inflows. These results suggest that energy infrastructure, communication infrastructure and trade openness are important in increasing the FDI inflows attracted to the country.
M.Com. (Development Economics)