Analyzing the Effects of FDI on Unemployment in Southern Africa (SADC)

This project presents an empirical investigation into the effects of Foreign Direct Investment (FDI) on job creation and unemployment within the Southern African Development Community (SADC) countries. The study utilizes panel data from 2008 to 2018, focusing on 15 SADC member states, to examine the causal relationships between FDI, inflation, government expenditure, economic growth, and employment levels. The research aims to test specific hypotheses regarding the impact of FDI on unemployment, the influence of inflation, and the role of population size. Employing panel data analysis techniques, including panel integration, Granger causality tests, and panel unit root tests, the study seeks to determine the direction and significance of these relationships. The project includes an extensive literature review, detailed methodology, and a comprehensive data analysis section that presents empirical results and findings. The conclusion summarizes the key outcomes and offers recommendations for policymakers to leverage FDI for economic growth and employment generation within the SADC region. The findings suggest a significant impact of FDI on employment, emphasizing the importance of attracting foreign investment to stimulate economic development.

RUNNING HEAD: Unemployment in SADC Countries 0
An empirical investigation on the effects of FDI on Job creation/unemployment in SADC countries.
Okheli Munotyiwa
[Pick the date]

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DECLARATION

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ACKNOWLEDGMENTS

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Executive Summary
The dissertation is based on the examination of the causal relationship between FDI
and employment in SADC countries. The objective of this study is to examine the
causal relationship between employment and other variables in the SADC regions
for the period of 2008-2018. The investigation is done in the panel data context and
focuses on checking the causal relationship between the variables such as inflation,
government expenditures, FDI, and economic growth with employment. The study
focuses on the panel of 15 countries in SADC bloc and for that panel data analysis
method is used to examine the dependency of one variable on other variables. The
main aim of the study is to check the null hypotheses that are; there is no
relationship between FDI and unemployment, inflation negatively impact on the
unemployment level and population size does not impact unemployment variables.
The study based on these hypotheses and all the tests is performed to check
whether these null hypotheses are rejected or accepted. In this study panel data is
used and for that justification is given, for the examination of relationship three
approaches are used that are panel integration, granger causality and panel unit root
to know the causation between two variables. Furthermore, empirical results are
disclosed in a table form that includes variables and methods used by the different
researchers and the outcome attained from there researches. The study also
investigates deeply the other independent variables and their impact on dependent
variables that is employment. Major concern is given on FDI as an independent
variable and how this affects the employment in SADC regions. At last, the study
reveals the outcome with proper analysis of data using different qualitative and
quantitative techniques of analysis. Furthermore, research ends with the conclusion
that is based on the findings of the study and that includes that null hypothesis that is
formulated that FDI has impact on employment in SADC regions is rejected and on
that basis recommendations are given to increase the inflow of FDI in the SADC
regions to ensure the growth of these economies. As from the study, it is known that
economic growth has a greater impact on the employment so initiatives taken by
policymakers to increase FDI will boost the economy and that will bring more
employment.

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Table of Contents
Chapter1. Introduction..................................................................................................7
1. Background to the study....................................................................................7
1.1 Objectives of the study.................................................................................8
1.2 Hypotheses of the study..............................................................................8
1.3 Study motivation and Significance...............................................................9
1.4 Structure of Study........................................................................................9
2. SADC FDI and Economic Growth...................................................................10
2.1 SADC Review............................................................................................10
2.2Economic growth dynamics and FDI in SADC...........................................11
Chapter 2: Literature Review......................................................................................15
1. Introduction......................................................................................................15
1.1 Foreign direct investment..........................................................................15
1.2 Theoretical framework...............................................................................17
1.3 Dependency theory;...................................................................................20
1.4Endogenous growth models theory............................................................20
2. FDI Effects on Employment................................................................................22
2.1 African countries specific focused research..............................................22
2.2 General Non-African Focus.......................................................................26
2.3 Summary of the empirical research...........................................................31
Chapter 3 Research Methodologies...........................................................................35
1. Overview of Methodology................................................................................35
1.1 Research Design.......................................................................................35
1.2 Research Methodology..............................................................................35
2. Model and Data...............................................................................................35
2.1 Justification for opting panel data..............................................................36

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3. Strategy for research.......................................................................................37
3.1 Empirical strategy /Model..........................................................................37
4. Hypothesis.......................................................................................................40
Chapter 4 Data and Analysis......................................................................................41
1 Empirical Results..................................................................................................41
1.1 Data Limitations and Exceptions...............................................................44
1.2 Findings.....................................................................................................46
Chapter 5: Conclusion and Recommendations..........................................................49
1. Introduction......................................................................................................49
1.1 Summary....................................................................................................49
2. Recommendations...........................................................................................51
References.................................................................................................................53
Appendices.................................................................................................................61
Appendix 1: Employment to Population Ratio (SADC countries)..........................61
Appendix 2: Foreign Direct Investment for period of 2007-2017............................61
Appendix 3: Foreign Direct Investment for period of 2018.....................................62
Appendix 4: Foreign Direct Investment Inflows and Outflows................................62
Appendix 5: GDP at Market Prices (US$ Million)....................................................63
Appendix 6: FDI by Member States (US$ Million)..................................................63

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List of Figures and Tables
Table 1: African Regional Blocs comparison with SADC 2017………………….14
Table 2: Summary of the Empirical Research …………………………………….35
Table 3: Statistics of independent variables used in study……………………..42
Table 4: Correlation Matrixes of the Variables…………………………………….43
Table 5: SADC Countries Panel Data Model………………………………………45
Table 6: Regression Analysis ………………………………………………………..48
Table 7: Analysis of independent variables ……………………………………….49
Figure 1: SADC GDP by country share (2017)…………………………………….15

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Chapter1. Introduction
1. Background to the study
According to the IMF 2019 FDI is considered as the investment by other entities
outside the home country in an international country. The empirical literature and
theory regarding FDI reveal that a huge contribution to economic growth can be
attained. Elboiashi (2011) elaborated that a country economy can improve through,
foreign technology, the introduction of new products, improving the stock of
knowledge via skills transfer and capital accumulation.
An important function that FDI plays as highlighted by Herzer et al (2003) is that it
impacts the economic growth of a country by increasing technological spillovers and
investable capital. The main functions of foreign direct investment are (i) enhance
enterprise development (ii) formulation and enhancement of human capital in the
country (iii) generate technology spillovers (iv) Involvement of host country in global
platform through trade and lastly development of businesses in the host countries.
United Nations conference on trade and development (UNICTAD) regards FDI as a
source of funding that is more stable considering its long-term view on the growth
potential, accessing new markets and raw material by the recipient country.
UNCTAD (1999); Dupasquier and Osakwe (2005) view the bestowing of foreign
saving as complimenting domestic savings as well. Furthermore, Ndoricimpa (2009)
outlines that FDI closes the funding gap on investments requirements and local
savings and boost the receipts on the balance of payment.
The above-perceived benefits have caused countries across the world and regional
blocs to actively develop and formulate policies that attract FDI. World Bank (2019)
noted a wave that started in 1980 of financial globalization. That witnessed global
FDI growing from 50 billion to 1,5 trillion in 2018. Such steady increase was also
noted in Africa and regional blocs like the Southern Africa Development Community.
Inward FDI according to the recent economic theory suggests that increase to the
supply of capital in the countries will resultant in the increase of investment in
domestic countries, technological transfers, employment creation and an increase in
exports resulting in an overall economy. Exogenous and endogenous theories
positively support the statement that FDI has a direct impact on economic growth.

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There is a relation between the FDI and growth of the countries and more inflow of
FDI in these countries leads to more employment and directly contributes to the
development of the economy. Recommendations from the international organization
were given and also from external advisors for development companies to focus
much on FDI as an external finance source for the countries or development
(Nunnenkamp and Spart 2003). The volatility on FDI which is low makes it a more
superior type of capital inflow in economic growth stimulation, apart from capital FDI
brings with it also the technology in the countries where investment is made.
Through that, it is outlined that a beneficial relationship between economic growth
and FDI exist in circumstances where a host country has a sound technological and
infrastructure development and the minimum level of education. However, the
question of causality exists even if a positive association is accepted. The Empirical
question remains if FDI cause development and growth, or is FDI attracted by fast-
growing economies as investing companies search for opportunities in better profits
and new markets
These links cannot be ruled out theoretically to show why the issue of causality has
been on top (Hansen and Rand 2005). The author goes on to point out the three
causal relationships that are present namely (i) FDI that drive growth (ii) FDI causing
economic growth (iii) Bi-directional causality.
1.1 Objectives of the study
The focus or aim of this study is to know the variables that highly influenced the
employment in SADC bloc. These variables are economic growth, foreign direct
investment, government expenditure, and inflation. All these variables will be studied
to find out the dependent variable or the most influenced factor on employment or
unemployment in SADC regions. The study mainly focuses on the causality level
between employment and all the variables stated above from 2008 to 2018 in the
SADC region.
1.2 Hypotheses of the study
To achieve the objective of the study listed above the following hypothesis tested:
i) FDI influences employment in SADC.
ii) Economic growth has a relationship with employment.
iii) Causal relationship between Government expenditure and Employment.

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iv) Inflation has an effect to employment.
1.3 Study motivation and Significance
The motivation for this study developed as a result of several reasons. As the
overview above shows, the stock and movement of FDI as a result of globalization
has increased for developed and developing countries that will benefit the whole
world. This placed FDI as a crucial source of funding. A lot of studies have pursued
to understand the relationship between the growth of economies and employment in
the countries and the role that FDI plays. The results of these studies have been
contradicting. Some results claimed that there is no relation between FDI and growth
of the economies while others assumed that FDI created jobs and had good effects
on economic growth. More of these studies have been done focusing on developed
countries and southeast Europe economies sharing the same characteristics
culturally and economically.
Friendly FDI policies and strategies have been developed and encouraged hoping to
stimulate economic growth. FDI attracting has been a major thing of concern for
policymakers for the growth of economies whether at national or international level.
The reasons for conducting this study are to make an empirical evaluation on the
impact of FDI on employment considering Government expenditure, Inflation and
economic growth in SADC very few if any researches have been done of such
nature on SADC.
1.4 Structure of Study
The composition of this study has six chapters organized as follows; Chapter one
introduces the study outlining the objectives, significances of the study and the
hypothesis. Chapter 2 gives an overview of the SADC economy. It gives the idea
about FDI policy development factors that contribute to the growth of economies. A
detailed definition of FDI is also given in this chapter. Furthermore, the empirical
analysis is done on the connection that exists between foreign direct investment and
economic growth and employment.
The methodology, model specification, and estimation technique are presented in
Chapter four. Chapter five presents the findings and analysis of the study and tests
that are performed for the outcome. The final chapter of the study focus on the

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summary of all the chapters and a brief conclusion and recommendations that can
be implemented by policymakers, finally study ended with the description of further
scope for the study.
2. SADC FDI and Economic Growth
2.1 SADC Review
Headquartered in Botswana Gaborone, Southern African development community
SADC is an organization formed by countries in the southern part of Africa Its
purpose was to enhance cooperation on social-economic matters to integrate and
also corporate on security and political matters amount the 15 member states.
Initially, SADC primary focus was to integrate the regional economy. however the
aim changed in 1992 broadening up to include, promoting mutual investments and
trade exchange, establishing an equality-based open economy ,tariff barriers
breaking down, balanced development and mutual benefits, enabling unrestricted
movements of goods, labor and personal services, gradual unification of currencies
and the tariffs in the community and establishing an unrestricted trade zone SADC
2001. This also saw the subsequent change of the name from the southern African
Development coordination conference to the Southern African development
community. The member states for SADC are fifteen and are as follows,
Madagascar, Zambia, Swaziland, Angola, South Africa, Zimbabwe, Mauritius,
Lesotho, Botswana, Mozambique, Republic of Congo and Malawi.
What’s the issue? SADC
The Organisation for economic development (OECD) on the SADC policy, briefly
placed investment attraction as a core agenda for development integration. To
diversify the SADC countries’ economies the member states acknowledge that
creating a conducive investment environment is key to economic diversification,
infrastructure development, creation of new labor skills and improve in participation
in global and regional value chains. Inward FDI flows have been increasing gradually
in the past decade. At one time Sub Sahara Africa was reported being the second in
the world in regions that are growing very fast. (IMF 2003) however such high growth
rates have a not had a tangible impact in areas like human development and poverty
reduction. Of concern is the little impact foreign investment in projects of huge scale
in developing domestic entrepreneurs and creating jobs for the hosting country