Financial development, foreign direct investment and economic growth nexus in South Africa

Abstract

Financial markets, a wide range of financial instruments and foreign direct investment inflows have grown in value and volume in a controlled manner during the decades under democracy in South Africa. According to its economic prospects and demographic potential, South Africa is distinguished as having a fast-growing market when compared to other developing economies. The relationship between a country's financial superstructure and economic development has long been emphasised in financial sector development literature. This study investigates the impact of financial sector development and foreign direct investment on economic growth in South Africa from 1994 to 2020. This study applied Augmented Dickey-Fuller (ADF) and Phillips Perron unit root tests, Bounds Co-integration analysis, Autoregressive Distributed Lag method, diagnostic tests and stability tests. The bounds cointegration test approach proved a long-run relationship among gross domestic product, domestic credit by private sector, and foreign direct investment. The ARDL method was employed to estimate the coefficients for the long run and short run model as well as the error correction term. The long run result indicate that liquidity liabilities and domestic credit provided by private sector have a negative relationship with economic growth. While domestic credit from the financial sector and foreign direct investment has a positive correlation with economic growth whilst in the short domestic credit provided by private sectorand liquidity liabilities have a positive relationship while domestic credit from the financial sector and foreign direct investment are negatively related to economic growth