Academic journal article Journal of Global Business and Technology

Determinants of Investment Activity in South Africa

Academic journal article Journal of Global Business and Technology

Determinants of Investment Activity in South Africa

Article excerpt

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

As one of the important macroeconomic variables, investment can ensure infrastructure development and growth in the economy by raising the productive capacity (Fedderke, Perkins & Luis, 2001; Cheteni, 2011; Ugwuegbe & Uruakpa, 2013). Investment activities can promote technical progress through the introduction of new technology and can reduce poverty through an increase in the level of employment. In the long run, through the production process, investment activities can create new capital goods. Majeed & Khan (2008) and Gkionis et al. (2015) indicate that to ensure growing capital stock in the country there must be higher rate of investment since investing in fixed capital stock can accelerate the economic growth. Gross Fixed Capital Formation (GFCF) is commonly known as the net investment, refers to the total fixed amount of the capital accumulated. It measures the capital stock; in the measurement it excludes land purchase but includes the disposal of fixed assets. Meaning increasing capital stock, excluding the land purchase and less disposable of fixed assets. As a result it can therefore be used as a measure of investment activity of a country (Mishkin, 2016).

During the 1980s and the early 1990s South Africa experienced a low GFCF due to civil conflicts and the apartheid regime (Fedderke, 2005). GFCF increased from R51 289 million in 1994 to R74 018 million during the fourth quarter of 1997. On the other hand, during the first quarter of 1998 the investment decreased by R2 653 from last quarter of 1997 and started increasing during the third and fourth quarters of 1998, but declined during the first quarter of 1999 due to the Asian financial crises. From 2000, the investment in South Africa has been increasing until first quarter of 2009 where the world was faced with financial crises. In 2015, the GFCF was around R161 182 million (South African Reserve Bank (SARB), 2015).

Literature provides contradicting views on the relationship between real interest rate and investment. For instance, other studies such as Majeed & Khan (2008) and Gkionis et al. (2015), are supporting the view that they are positively related while some such as Veemon et al. (1996) are supporting the view that they are negatively related. Therefore, this study has been motivated by Gkionis, et al. (2015) who found out that factors such as output growth, private credit growth, taxation and interest rates act as determinants of investment activity in Greece. Also, Michaelides et al. (2005) included profitability to output growth and interest rates.

Developing countries in Africa deal with a growing inability to encourage investment. Fluctuations in GFCF (net investment) need to be addressed by the policy makers, with particular concern of the declining trends. This is due to the fact that GFCF is associated with the importance of acquisition of the existing fixed assets. In addition, as one of the components of GDP, it measures the amount of the new valued added within the economy which is invested rather than used. Decreasing GFCF can result into slow growth rate in the economy, lack of innovation, and difficulties when it comes to the matters related to prediction of investment return (Majeed & Khan, 2008). For example, in South Africa there was a drastic decline of GCFC in 2008 and fluctuated after 2010. Based on the slow growth of investment activities as indicated by the trends in GCFC, it was interesting to find out what determines the investment activity in South Africa. Therefore, the study examines the determinants of investment activity as measured by GFCF in South Africa from 1994 to 2015.

LITERATURE REVIEW

Several investment theories such as the accelerator theory, the rigid accelerator theory and the flexible accelerator theory are considered as theoretical framework of this study. The accelerator theory of investment suggests that in a firm, an increase in the rate of output will entail a comparable increase in the capital stock. …

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