Re-visiting the FDI-led Growth Hypothesis for South Africa: The Role of Industrialization and Urbanization

This study aims at investigating the FDI-led growth hypothesis in the case of South Africa using time series data spanning from 1970 to 2017. The empirical rout begin with the unit root tests using the traditional ADF, PP, and the confirmatory KPSS unit root test as well as the Zivot-Andrew unit root test which accounts for a single structural break. The overall result revealed a mixed order of integration between the series. Given the above outcome, the study employed the dynamic ARDL bounds testing to cointegration which reveals long run equilibrium between the variables of interest. The revelation from the study further proves that FDI inflow asserts a significance positive impact on economic growth both in the short and long run. The dynamic Granger causality test indicates a one-way interaction running from FDI inflow to economic growth which aligns with FDI-led growth hypothesis. In-view of the findings, this study therefore recommends that the South Africa government should shift her attention first, to expanding the absorptive capacity of the South African economy above the standard threshold; this will help in converting FDI inflow to South Africa to its full capacity which will in turn drive economic growth proportionately. Also, the study suggests the formulation of mechanism or measures that will help attract a diversify FDI inflow to other sectors of the economy such as manufacturing, agriculture with the aim of achieving training and technology transfer in other to harness the spillover effect of FDI inflow on the economy as a whole. Keywords: Foreign Direct Investment, Economic Growth, Industrialization, Urbanization