The impact of foreign direct investment on productivity and growth in the Southern African Development Community (SADC)
Doctoral Thesis
2015
Permanent link to this Item
Authors
Supervisors
Journal Title
Link to Journal
Journal ISSN
Volume Title
Publisher
Publisher
University of Cape Town
Department
Faculty
License
Series
Abstract
This thesis focuses on the impact of foreign direct investment on productivity and growth in the Southern African Development Community (SADC), which is dealt with in three related studies. The first study undertakes an investigation of the existence and nature of technology and productivity spillovers from foreign direct investment to domestic firms in the region, while the second investigates the role of the spatial density of economic activities in speeding up the productivity externalities and impact of foreign direct investment in FDI host countries. In the last study, we investigate the role of intra-regional bilateral foreign direct investment between South Africa and countries in SADC in influencing growth and income convergence in the region. The three studies are subjects of chapters 2, 3 and 4, respectively. The first study uses firm level data from the World Bank Enterprise Surveys and employs alternative techniques to identify and estimate the within and intra-industry productivity impact of firm foreign ownership. It uses output per worker to measure firm productivity and employs sector fixed effects to identify the impact of foreign firm ownership on productivity. We find results that strongly suggest the existence of positive within firm and intra-industry FDI productivity spillover effects for the firms in the region; with both small and large firms experiencing productivity gains from more foreign firm ownership, although the productivity gains are larger for small firms than for large firms. Individual country productivity estimations suggest that relatively more developed countries have larger intra-industry spillover gains while less technologically endowed countries have lager within firm gains. In overall terms the chapter concludes that the region has productivity gains from FDI. In the second study we employ macro time series data over 1980 to 2011 to estimate the separate and joint productivity effects of agglomeration and FDI externalities in the region. In order to achieve these objectives, we develop a theoretical framework that fuses together the roles of agglomeration and FDI productivity spillovers to be able to identify both individual and joint impacts of FDI and density on aggregate productivity growth. An instrumental variables estimation technique is employed, allowing for country fixed effects to identify the impacts of critical variables on productivity. Using an index of density constructed from the interaction of population density and urbanization to measure density of economic activities, we find results suggesting positive and complementary effects of agglomeration and FDI externalities on aggregate productivity in the region. The finding is robust to controlling for other alternative channels through which FDI and agglomeration productivity externalities can be transmitted to productivity such as human capital and human capital density. Consequently, we conclude that there are synergies between FDI and agglomeration that magnify productivity externalities from foreign direct investment in the region. The third study is devoted to investigating the productivity and income convergence implications of bilateral FDI between South Africa as the leading FDI and technology source country in SADC and the rest of the countries in the region within the leader follower model of international technology diffusion and convergence suggested by Barro and Sala-i-Martin (2004). Using country per capita income data over the period from 1980 to 2011, we find evidence suggesting that countries with high levels of bilateral FDI between themselves and South Africa converge faster both on the region average income and on South Africa's per capita income than those with low bilateral FDI stocks. The finding is robust to estimating countries' income gaps to South Africa conditioned alternative potential sources of technology and productivity growth, including trade, FDI from the rest of the world and domestic capital formation. There are, therefore, prospects of technology and income convergence driven by South Africa as the major FDI country and technology leader in the region.
Description
Includes bibliographical references
Keywords
Reference:
Masiyandima, N. 2015. The impact of foreign direct investment on productivity and growth in the Southern African Development Community (SADC). University of Cape Town.