Linkages between foreign direct investment, trade openness and economic growth in South Africa : does exchange rate regime choice matter?

This paper investigates the linkages between FDI, tradeopenness, and economic growth, and the role of exchangerate regime choice. To achieve this objective, the studyused a secondary data set for the period 1995 - 2018 for South Africa. The study employed the ARDL and Granger causality test. The results showed no Granger causality between GDP and FDI. Uni-directional Granger causality was found to flow from GDP to trade openness and FDI to exchange rate. A bi-directional causality was established between GDP and exchange rate, and between trade openness and exchange rate. A Gregory-Hansen cointegration test was introduced to handle the concept of regime changes in the current study. Findings from the ARDL with a known structural break for exchange rate regime choice revealed that exchange rate had a significant positive impact on economic growth in the short-run, whereas it had a significant negative impact on economic growth in the long-run. This implies that, during the initial stages of an exchange rate policy, the South African rand appreciated, leading to a boost in economic growth. A change from managed float exchange rate regime to a free float exchange rate regime caused a 1.49% increase in economic growth. This may be interpreted as an indication that the free float exchange rate is a better choice compared to a managed float exchange rate. To conclude, the paper discusses policy implications and suggestions to policymakers in South Africa.