FDI - Employment Short-Run dynamics in South Africa: VECM approach

Abstract

This study uses the annual time –series data covering the period 1970 to 2013 to analyses the effect of employment on foreign direct investment (FDI) in South Africa using the vector error correction modelling (VECM). For this purpose, the behavioural patterns and quality of data are tested and these include the unit root test using the ZAU test and as well as the Correlograms for serial correlations. The ZA unit test results show that FDI, employment, real interest rates and real effective exchange rate are integrated of order zero while inflation was found to contain unit root. The Johansen cointegration test was performed to establish the number of cointegration vectors in the model and the test provides evidence of at most one cointegrating vector. With the long-run relationship present, the possibility of having short-run shocks was done with the aid of the VECM. VECM indicates that employment affects FDI positively in the short-run. Therefore, stable and economically sound environment and sound macroeconomic fundamentals are required in order to improve attract more FDI into South Africa.