Foreign Direct Investment and the Development of Small and Medium Sized Enterprises in South Africa

Master Thesis


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University of Cape Town

Developing local SMEs will lead to sustainable economic growth, as well as the empowerment of communities. In addition, extensive literature over the years have proven that FDI does not lead to economic development and that it is in the best interest of a country to have an international trade friendly policy. The South African government has a mandate to lessen unemployment by 6% by 2030 as part of their National Development Planning (NDP) Vision 2030. This study seeks to discover the impact of FDI on developing SMEs in South Africa. Literature has supported the notion that SME development leads to growth as it increases economic activity, however, conflicting views exist about contributing FDI to SME development. Additionally, there has been a gap in literature for South Africa as the focus has been on SSA, because of the lack of publicly available information on FDI projects performed by SMEs. This study sets out to learn the factors that affect FDI in SA as well as the impact of those factors on SME development, as they are instrumental in driving economic growth. The factors researched were GDP growth, inflation rate, corruption index, GDP per capita, sum of imports and exports as a % of GDP, infrastructure development, research and development and the GDP. This study used the unrestricted ARDL statistical technique in variables selection. This method kept 3 variables out of 8 initially in the model, eliminating issues of multicollinearity and unreliable coefficients with large variance and standard errors. This method ensured that the best-fit model was selected to explain the determinants of FDI. The findings of the study indicated a positive relationship between FDI, market size and macroeconomic stability, while the relationship to political risk was negative. An assumption that drivers of FDI also impact the development of SME was used and the best-fit variables of FDI drivers were fitted in an ARDL, to determine the relationship between FDI and SME development. The test returned a statistically insignificant yet positive relationship between SME development and FDI. Based on the findings, the research recommends firm level investigation for SMEs on FDI involvements to better determine the factors that lead to their development.