Bilateral FDI from South Africa and Income Convergence in SADC
J. Paul Dunne and Nicholas Masiyandima
Abstract : This study investigates whether bilateral foreign direct investment (FDI) between a technology leader country
and follower countries has technology and productivity externalities that speed up income convergence among the countries.
The study is based the Southern African Development Community (SADC) region, in which South Africa is identified as both
the technology leader and a major source of FDI for the other 14 developing countries in the region. Using countries’ per capita
incomes time series over a period spanning from 1980 to 2011, the results of the study show that bilateral FDI between South
Africa and countries in the region fosters income convergence in the region. Countries that have higher FDI stocks from South
Africa exhibit higher rates of convergence towards both the regional average per capita income and South Africa’s per capita
income, than those that host less FDI stocks.
1. Introduction
Intra-Africa foreign direct investment (FDI) has been increasing at an encouraging rate, led by South African, Mauritian,
Kenyan and Nigerian transnational corporations (TNCs), with the share of intra-Africa greenfield investment projects
rising to 18 per cent of the cumulative FDI for Africa between 2009 and 2013, compared to an increase of only 5 per cent
between 2003 and 2010. Similarly, the share of the continent’s foreign direct investment inflows from the rest of the world
has been rising since 2000 (Anyanwu and Yameogo, 2015). However, relative to investment from the rest of the world,
intra-African investments are increasingly concentrated in manufacturing and services, with 49 per cent of the intra-
continental investment between 2009 and 2013 in the manufacturing sector (UNCTAD, 2014). This potentially gives the
continent enhanced growth opportunities in intra-regional trade, global value chain participation and more importantly,
technology convergence.
Within Africa, the Southern African Development Community (SADC) has seen significant increases in FDI, both from
outside and inside the region, with the intra-regional investments being dominated by South Africa, which accounted for around
80 per cent of the FDI stock within the region. In 2010, for example, the country had collective investments amounting to US
$980 million in Botswana, Mauritius, Mozambique and Zambia (UNCTAD, 2014). This FDI is principally in the private sector,
which potentially gives greater opportunities for the recipient countries to benefit from technology transfers, giving the region
greater leverage to foster technology and income convergence. This, however, does not seem to be obvious when disparities in
the region’s current per capita income are considered.
This study investigates whether there has indeed been FDI-led technology diffusion and income convergence in the
region over time and whether this has been driven by South Africa’s intra-regional FDI. Existing theories provide no
consensus as to what should be expected. Open economy neoclassical growth models would predict income convergence
for the region, through cross border goods and capital movements driven by differentials in returns to capital (Stanisic,
2012), while an endogenous growth model with increasing returns to capital, would suggest that the opportunity for
income convergence in the region is limited. Countries that have more research and development (R&D) in the region such
as South Africa and Mauritius would be expected to accelerate and diverge from the low R&D and human capital
countries. At best, what might happen is some form of club convergence within different income categories (Quah, 1996;
Lim and McAleer, 2004; Stanisic, 2012).
J. Paul Dunne, School of Economics and SALDRU, University of Cape Town, Rondebosch, Cape Town 7701, South Africa; e-mail: John.
Dunne@uct.ac.za. Nicholas Masiyandima (corresponding author), Reserve Bank of Zimbabwe and School of Economics, University of Cape Town,
Rondebosch, Cape Town 7701, South Africa; e-mail: nicmas773@gmail.com.
African Development Review, Vol. 29, No. 3, 2017, 403–415
© 2017 The Authors. African Development Review © 2017 African Development Bank. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. 403