Capital flows and economic performance in South Africa

This paper assesses the role of foreign investment in the economic performance of South Africa. Although the evidence is inconclusive about how foreign capital flows affect aggregate variables, there is clear evidence of their positive and significant long-run effects at the sectoral level. Foreign direct investment has a positive impact on economic performance and is in turn attracted to sectors with stronger performance. Debt instruments tend to display stronger long-run relationships with economic performance indicators than equity and investment fund shares. Overall, the analysis in this paper confirms the beneficial effects of foreign direct investment on the South African economy. The design of capital flow management policies should thus take into account the sectoral impact of direct investment and its potential to stimulate sectors’ economic performance.