Abstract
This study examines the relationship between foreign direct investment (FDI) inflows and export diversification in South Africa, at a sub-sectoral level, using time series data from 1980 to 2023. The study employed the Quantile Auto-Regressive Distribution Lag (QARDL) approach as a measure of analysis. The results reveal that, while FDI inflows generally show a positive relationship with export diversification, their impact varies significantly across sectors. In sectors like machinery and transport equipment as well as commodities and transactions, FDI fosters diversification by driving technological advancements, skill transfers, and improved production processes. A long-run relationship exists between these variables in the various sectors. However, in such industries as beverages, tobacco, crude materials, and miscellaneous manufactured articles, the effect of FDI is minimal. Factors like domestic industrial capacity, trade policies, and global market dynamics play more pivotal roles. The findings emphasise the influence of sector-specific characteristics and economic conditions in shaping the role of FDI. This suggests that targeted policies are essential to maximise FDI’s contribution to export diversification in South Africa. Thus, policymakers should implement sector-specific strategies that support high-value-added industries, strengthen regulatory frameworks, invest in infrastructure and skills development, and support SMEs' integration into global value chains. These measures would maximise FDI spill-overs and promote sustainable export diversification in South Africa.