Linkages between Foreign Direct Investment, Trade Openness and Economic Growth in South Africa: Does Exchange Rate Regime Choice Matter?
Abstract
This paper investigates the linkages between FDI, tradeopenness, and economic growth, and the role of exchangerate regime choice. To achieve this objective, the studyused a secondary data set for the period 1995 - 2018 for South Africa. The study employed the ARDL and Granger causality test. The results showed no Granger causality between GDP and FDI. Uni-directional Granger causality was found to flow from GDP to trade openness and FDI to exchange rate. A bi-directional causality was established between GDP and exchange rate, and between trade openness and exchange rate. A Gregory-Hansen cointegration test was introduced to handle the concept of regime changes in the current study. Findings from the ARDL with a known structural break for exchange rate regime choice revealed that exchange rate had a significant positive impact on economic growth in the short-run, whereas it had a significant negative impact on economic growth in the long-run. This implies that, during the initial stages of an exchange rate policy, the South African rand appreciated, leading to a boost in economic growth. A change from managed float exchange rate regime to a free float exchange rate regime caused a 1.49% increase in economic growth. This may be interpreted as an indication that the free float exchange rate is a better choice compared to a managed float exchange rate. To conclude, the paper discusses policy implications and suggestions to policymakers in South Africa.
Keywords:
Economic growth; Exchange rate regimes; Foreign direct investment; Trade opennessReferences
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