China's success in FDI: Why South Africa can learn from it

Yu, Junyan

China's success in FDI: Why South Africa can learn from it

Master Thesis

2017

Publisher

University of Cape Town

Department

School of Economics

Faculty

Faculty of Commerce

Abstract

Following economic reforms in 1978, the growth of Foreign Direct Investment (FDI) into China has been dramatic. The massive FDI inflows greatly benefited China's economy and contributed to its steady and rapid economic growth. Most FDI empirical studies use panel data as it solves the problem of data limitation, but it also produces 'average' effects for the results of the group of countries under study. Thus, individual countries in the group may generate different results when tested separately with the same model. This study uses an alternative approach that focuses on finding a Vector Error Correction Model with similar macroeconomic determinants of FDI for South Africa and for China. For both countries, larger market size and more advanced technology have a positive effect on FDI inflows, whereas higher labour cost affects FDI negatively. For the China model, infrastructure has a positive influence on its FDI inflows, whereas for the South African model worker strikes have a significant negative impact on FDI. Furthermore, we find remarkable similarities regarding the sectoral composition of FDI inflows in both countries, which further highlights the potential lessons that South Africa could learn from China regarding their highly successful FDI experience.

Keywords

Economics

Foreign Direct Investment

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