Africa Growth and Opportunity Act in the context of Southern African Development Community: FDI, trade, regionalism and economic growth

Abstract

This study first examines how government policy, economic, institutional, and political characteristics affect Foreign Direct Investment (FDI) inflows under the Africa Growth and Opportunity Act (AGOA) in the South African Development Community (SADC). The results indicate that countries with a large market size, a more liberalized trade regime—represented by a higher degree of openness, a low inflation rate, and highly skilled labor promote FDI inflows. A high inflation rate and low institutional quality have the opposite effect. The second part of this study provides a quantitative assessment of the determinants of economic growth and the role of South Africa as a springboard to FDI in the SADC. I found that FDI and infrastructure are important determinants of economic growth in the region. The results also support my hypothesis that South Africa acts as a "leading goose" in the region through FDI and trade. I also found a positive and statistically significant impact of foreign income on the growth of the SADC. Last but not least, in order to capture the geo-political dynamics of regionalization of members of the SADC, I investigate quantitatively which country or countries' GDP per capita significantly impacts GDP per capita of other SADC members. I found that five countries' GDP per capita in the SADC region have a positive and statistically significant impact on growth of the region. Except for Mauritius, these countries have close ties with South Africa due to their geographical position. Countries that have a positive impact on regionalization are: Botswana, Lesotho, Mauritius, Swaziland and Zimbabwe.