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Impact of FDI on GDP: A Comparative Study of Mozambique and South Africa

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Journal of Economics and Sustainable Development www.iiste.org
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.7, No.2, 2016

Impact of FDI on GDP: A Comparative Study of Mozambique and

South Africa

Abeid Ahmed Ramadhan*1, Zhi Hong Jian 2 Yapatake Kossele Thales Pacific3
School of Economics, Huazhong University of Science and Technology Luoyu, Road. Wuhan, China
430074
Abstract
Foreign Direct Investment (FDI) is regarded as vital injections incentive to the Mozambique and South Africa
countries to improve and accelerate the economic growth. A few studies have been made in these two countries.
This paper used yearly secondary data of Mozambique and South Africa covering the period1996-2014 to
examine the effects of FDI on Gross Domestic Product (GDP). The variables used in this analysis are GDP is
used as a dependent variable while Total Labour Force, human capital and Gross Fixed Capital Formation
variable were regarded as independent variable. By using ordinary Least Square method of regression, the
results from regression shown FDI is not significant but have positive relationship with economic growth for
Mozambique. While for South Africa, FDI and total labour force is significant at the 10% level but have negative
and positive relationship respectively with economic growth. It is important for both countries to improve its
sectors of electricity supply and logistics and its business climate as well as to improve the governance in order
to maintain a long run economic development and growth.
Keywords: Foreign direct Investment, GDP, Least Square method, Mozambique, South Africa.

Introduction
Foreign Direct Investment (FDI) is regarded as vital injections incentive to the developing countries to improve
and accelerate economic growth. FDI inflows are useful to countries in various economic sectors such as
financial resources, technology know-how and skills. Since most of the developing countries are experiencing a
lack of financial resources, level of technology and skills. Foreign Direct investment is a vital factor for
sustainable economic development and poverty alleviation as developing countries seek for FDI inflows to
improve their economic growth. Most of FDI in Africa is injected in private sectors such mining, oil extraction,
gas discovery, banking services, and other infrastructures such as telecommunication service road and airport
construction for tourism point of views. According to Andreas (2006) who employed both cross section and
panel data on 90 countries for 1980-2002, his result showed that FDI inflows brings about (a positive impact on)
economic growth in those selected developing countries. Moreover, Ndikumana and Verick (2008) and Lumbila
(2005) argued that FDI has a positive significant influence on economic growth to developing countries. FDI
inflows to developing countries have different opinions by the scholars and researchers. Some researchers
believe that FDI could be more helpful to developing countries to finance their long-term investment and can
bring about positive effect in the economic growth while others argued that FDI is not helpful for the developing
countries to attain and sustains economic development growth. Hence, they have to make good polices in order
to attract FDI inflows. They have to analyse on which priority areas that FDI inflows are needed in order to
promote their economic growth. Alfaro (2003) argued that FDI inflows can be more helpful to developing
counties because it act as source of valuable technology and know-how to host developing countries by
promoting linkages with local firms through MNEs. According to the World Investment Report (2013) by
UNCTAD, the potential attractiveness for foreign investment in South Africa is higher compared to other
countries, however performance is relatively low in terms of FDI attraction although the country progress
through the investment potential in infrastructure. South Africa is the third country in terms of FDI inflows in
Africa, after Nigeria and Mozambique. However Mozambique is the third host country for FDI in Southern
Africa enjoying its maritime opening. The flows have been supported in recent years, particularly since 2011. In
2014, Mozambique has attracted more than 4 billion EUR of foreign direct investment, substantial higher than in
2013. The discovery of new gas fields generates a significant increase in foreign investment. The country has
varied natural resources (energy, mining, agriculture, forestry, and fishing). Moreover, its geographical location
gives it a special place in the field of transport. This consistency in driving of reform and sound economic
policies and its public enterprises privatization program also offer great opportunities for foreign investors. This
brief overview on the investment in these countries let us understand the amount of FDI that flows in

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ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.7, No.2, 2016

Mozambique and South Africa are enormous to maintain a sustainable GDP growth. Mozambique and South
Africa need FDI is due to the fact that the FDI is very vital source of capital formation mostly when they have
low level of capital base. Therefore FDI inflows allow countries to create surplus in the capital account and
promotes jobs opportunities and reduce the level of unemployment and poverty reduction. It is also important for
transferring technology to developing countries. This will in turn help to improve the local production method
resulting into better production and outputs, moreover, an increasing in terms of FDI amounts will have positive
impact on the economic growth of the country especially the GDP. In another term FDI contribute to economic
growth through different (channels) channel. Its affect GDP through being a source of capital formation. The
gross domestic product (GDP) is one of the most used measurements to measure the production of an economy.
According to Samuelson and Nordhaus (1948) in their book titled Economics, they argued that GDP allows
policymakers and central banks to judge whether an economy contracts, if it is expanding, if it needs a boost or
restraint, and if a threat as a recession or inflation looms on the horizon. If GDP is considered as source of
judgment if it is important for African countries to set up some policies in order to increase GDP making FDI to
be one of the key element to increase the GDP .According to Chenery and Strout (1966), they advocated that
most countries were able to attain economic revolution by screaming for foreign aid and foreign direct
investment in particular during 1966. Both developed and developing countries seek for FDI to improve their
economic development. According to index mundi website the GDP composition by sector in Mozambique
consists of three sectors such as Agriculture, Industry and Service. Agriculture has 28.7.6% of total GDP,
Industry has 24.9% of total GDP and Service has 48.4% of total GDP while South Africa, Agriculture has 2.6%
of total GDP, Industry has 29% of total GDP and Service has 68.4% of total GDP. The aim of this paper is to
examine the effect of FDI on GDP of South Africa and Mozambique using multiple regressions, and further
identify and recommend which lessons South African and Mozambique should learn from each other. The paper
is structured into four sections. Following the introduction in section I. Section II takes the literature review.
Methodology, results and discussion occupies section III while section IV takes conclusion.

Related literature Review

FDI is one of the economic significant indicators to be injected in the economy for the economic development in
the long-run for Mozambique and South Africa countries. Many researchers have been more interested in
examining the impact of FDI on economic growth. According to the study by Bezuidenhout (2009) argue that
FDI is very significant indicator to influence economic growth. Bezuidenhout (2009) also further explain that
FDI inflows will be properly managed if a country has potential incentive good criteria, then, more FDI inflows
will flow and generate positive impact on GDP. Anyanwu (2012) analyses factors that influence FDI inflows
Africa” found that market size, openness to trade , foreign aid, rule of laws and past FDI inflows had a positive
effect on FDI inflows while higher financial development as a negative effect on FDI inflows. Hanson (2001)
found that the FDI inflows spill-over for host countries is weak. According to Lall (2002), FDI inflows may
influence various economic factors that affect economic growth and FDI inflows vary over time from one host
country to another. He also argued that the effect of FDI on growth cannot easily be measured directly due to the
fact that its impact depend on how it affect other factors. Gorg and Greenwood (2002) by examining the micro-
data relating to spillovers from foreign firms investors to domestic firms, their results showed that FDI inflows
generates negative effect on growth. De Mello (1999) found that FDI had a negative effect on non-OCED
countries since FDI inflows decrease total factor productivity growth. Dondeti and Mohanty (2007) argue that
FDI inflows can provide (proved) a ready market to the world and acts as key measure player for the host
country to participate in the globalization process. Chowdhury and Mavrotas (2003) argued that the impact of
FDI inflows to economic growth cannot be accessed within short-run period since its impact to economic
growth rely on other factors such the level openness in the economy and human capital base in the host
country . FDI impacts to economic growth should be measures in the long-run period. Gorg and Greenway (2002)
advocated that FDI can be seen as one of the sources of capital and technology that Mozambique and South
Africa countries may rely on their servings or can find another way by seeking loans from global markets and
other internal and overseas financial institutions in order to raise their capital base needed to finance their project
for economic growth. They also pointed that countries which are in need of FDI in terms of technology and
capital must advocate their limited resources for conducting domestic research and development that can lead
them for technological sophistication. Townsend (2003) claimed the relationship between FDI and economy
growth is uncertain. Moreover, some researchers think that impact of FDI to economic growth base on
theoretical and analytical findings assuming that FDI is very useful indicator for economic growth to developing
countries. The study of Carbolic and Levine (2002) examined the relationship between FDI and economic

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ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.7, No.2, 2016

growth for 72 countries covered the period ranging from 1960-1995. Their findings showed that FDI inflows did
not affect an independent influence on economic growth to both developed and developing countries. Bora (2002)
argued that FDI inflows may cause large scale environment negative impact if it is not well properly implanted
in mining sector. Değer and Emsen (2006) by examining the relationship between FDI and economic growth for
27 transition economies covered the period from 1990-2002 by making distinction of Central Eastern Europe
and Central Western Europe Asian countries by using panel data regression analysis. They found that FDI
inflows have positive effects on transition economies. According to the study conducted by Mwilima (2003) on
the impact of FDI on economic growth in 73 countries, argued that FDI is not a useful and instrument tool for
development. He also argued that that the incentives and tax holiday adopted by most Africa countries to attract
FDI inflows have not bear fruit, instead adding more economic problems to some countries such as South Africa,
etc. Ercakar and Yılgör (2008) by examining the long-term relationship between FDI and economic growth in
19 selected countries by using the data covered the period of 1980-2005 using panel data unit root test and panel
co-integration test. Their result by using the panel data unit root test showed that FDI and GDP do not have unit
root test while the result of using panel co-integration test showed that co-integration test verify the long-term
relationship between FDI and GDP. Khawar (2007) examined the impact of FDI on economic growth using OLS
from 1970-1992 found that the FDI is significant and positively correlated on GDP. Athukorala (2003) examined
impact of FDI on GDP using time series found that FDI is not a solely economic tool to influence economic
growth. Moreover, Hermes (2003) , O’Sullivan & Sheffin (2003) explained that the impact of FDI on the GDP
of a country is aimed to stimulate GDP at large when the economy is influence by high rates of unemployment,
this in turn , it also increase wages.

Methodology
This paper used multiple by using Ordinary Lest Square (OLS) method for data analysis. The introduction and
inventions of technology change leading to change the production function, resulting into more output, I also
introduce net export (NX) as the measure of foreign trade in the economy. Assuming constant technology, any
increase in the amount of labor and/or capital will increase the level of output in the economy. The study by
Barro and Sala-I Martin (1995) show that they expanded this production function according to the new growth
theory. The model to be used in this study is shown as follows:
GDP = β 0 + β 1GCF + β 2 LFT + β 3 FDI + β 4 HC + ε
GDP=β0+β1GCF+β2 LFT +βFDI3+β4HC) + ε
Where:
GDP = Gross Domestic Product (in $)
GCF = Gross Fixed Capital Formation % on GDP
FDI = (in $)
LFT = Labour Force Total of country
HC = Human Capital
We used five variables such as: Gross Domestic Product (GDP), Foreign Direct Investment net inflows (FDI),
Gross Fixed Capital Formation (GCF), Labour Force Total (LFT) covering the period from 1996 to 2014 using
Least squares method. Data was collected from World Bank and UNCTAD database and Human Capital (HC)
from Human development Index.

Results and Discussion

Table 2 and Table 4 represent the summary of statistics for Mozambique and South Africa. The levels of FDI in
Mozambique have been increased yearly compared to South Africa. FDI in Mozambique has been increased
from USD $ 64400000 bil to USD $ 6700000000 from 1996 to 2014 while South Africa has been increased
from USD $550000000 to USD $ 9890000000 1996 to 2014. FDI has small deviation compared to South Africa.
We run the multiple regression for Mozambique and South Africa separately based on the above specified model
and we obtain the following results shown below respectively. Table 3 and Table 5 show the estimated regression
explaining the impact of FDI on GDP of Mozambique and South Africa respectively. Table 3 shows that FDI is
not significant but have positive relationship with GDP of Mozambique despite the amount of FDI inflows in
this country (Table 1). This can be explained by others factors which are outside our model such as forming good

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ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.7, No.2, 2016

policies through utilization to the priorities sectors which in turn affect economic growth. Others independents
variables are not significant. Table 5 shows that both FDI and total labour force are significant at level of 10%
respectively. However, FDI has negative relationship with GDP but Total Labour force has positive relationship
with GDP. This result is consistent to the study by Gorg and Greenwood (2002). Moreover, such results can be
influenced by other factors that are outside of the model such as lack of transparency and lack of adequate
infrastructure. Other independent variable Gross Fixed Capital Formation and human capital are also not
significant to South Africa.

Conclusion
This paper intends to examine the impact of FDI on GDP of Mozambique and South Africa covering the period
for 1996-2014. We employed five variables: GDP (dependant variable) and other four independent variable such
as FDI, Total Labour Force, human capital and Gross Fixed Capital Formation. After running Ordinary Least
Square (OLS) method of regression; we found that FDI is not significant but have a positive relationship with
GDP while South Africa has negative relationship with GDP. From the literature review perspectives we
expected that FDI in South Africa would be positive affecting its economic growth as the case of Mozambique,
but however the impact of FDI in South Africa is negative .It is important for both countries to improve its
sectors of electricity supply and logistics and its business climate as well as to improve the governance.

References
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Vol.7, No.2, 2016

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Appendix
Table1: GDP and FDI in Mozambique and South Africa
MOZAMBIQUE SOUTH AFRICA
YEAR GDP FDI GDP FDI
1996 3241719358 72500000 1.47608E+11 816389273.8
1997 3810025426 64400000 1.52586E+11 3810543923
1998 4324474011 212700000 1.37775E+11 550338596
1999 4536278938 381700000 1.36632E+11 1503332454
2000 4310090791 139200000 1.36362E+11 968831356
2001 4075049538 255416251 1.21516E+11 7270344986
2002 4201332885 347584940 1.15482E+11 1479804589
2003 4666197195 336698815 1.75257E+11 783136092.3
2004 5697991242 244703873.4 2.28594E+11 701422007.6
2005 6578515331 122413755.6 2.57772E+11 6522098178
2006 7095918239 185376653.3 2.71639E+11 623291744.3
2007 9115528844 416689348.4 2.99415E+11 6586792253
2008 11050262133 559119391.3 2.8677E+11 9885001293
2009 10718503687 899291141.6 2.95936E+11 7624489974
2010 10119169260 1258161877 3.75349E+11 3693271715
2011 13197133578 3645044842 4.16597E+11 4139289123
2012 14934374229 5635092659 3.97386E+11 4626029122
2013 15457196860 6697422432 3.66058E+11 8232518816
2014 16385584919 3.49817E+11 5740650679
Source: author’s construction based From World Bank, 2015
Table 2: Summary statistics for Mozambique

Variable Obs Mean Std. Dev. Min Max

GDP 19 8.08E+09 4.42E+09 3.24E+09 1.64E+10
GCF 19 19.39353 4.84125 13.19378 30.95058
FDI 18 1.19E+09 2.00E+09 6.44E+07 6.70E+09
LFT 18 9734366 1395178 7576099 1.21E+07
HC 7 0.362857 0.038295 0.285 0.393
Source: author’s construction from Stata 12.0 software

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ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.7, No.2, 2016

Table 3: Regression results for Factors affecting GDP in Mozambique

VARIABLE β -Coefficient Std. Err. t-Statistic P>|t|
FDI 0.628931 1.019469 0.62 0.6
GSF -2.06E+08 4.30E+08 -0.48 0.68
LFT 2947.355 8933.925 0.33 0.773
HC -4.89E+10 2.77E+11 -0.18 0.876
Constant -9.90E+08 3.13E+10 -0.03 0.978
R-squared = 0.9608
Adjusted R-squared = 0.8824
F-statistics = 12.25
P-Statistics = 0.0769
Source: author’s construction from Stata 12.0 software

Table 4: Summary statistics for South Africa

Variable Obs Mean Std. Dev. Min Max

GDP 19 2.46E+11 1.04E+11 1.15E+11 4.17E+11

GCF 19 18.79998 1.899844 15.74461 23.00551

FDI 19 3.98E+09 3.07E+09 5.50E+08 9.89E+09

LFT 18 1.71E+07 1446805 1.43E+07 1.94E+07

HC 7 0.636429 0.0179244 0.608 0.658

Source: author construction from Stata 12.0 software.

Table 5: Regression results for Factors affecting GDP in South Africa

VARIABLE β –Coefficient Std. Err. t-Statistic P>|t|
FDI -49.72648 16.77083 -2.97 0.097*
GSF -5.38E+09 1.76E+10 -0.31 0.788
LFT 261576.3 73310.23 3.57 0.07*
HC -7.20E+12 3.10E+12 -2.32 0.146
Constant 5.43E+11 9.68E+11 0.56 0.631
R- square = 0.9445
Adjusted R- square = 0.8334
F-statistics = 8.51
P-Statistics = 0.1080
Source: author construction from Stata 12.0 software.
The symbol (*), (**) and (***) show that coefficient are statistically significant at 10%, 5% and 1% levels
respectively.

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