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practices used by foreign firms.
This contagion or knowledge diffusion (often referred to as externalities or efficiency “spillovers”) can lead to improvements in productivity and efficiency in local firms in several ways. In its simplest form, a spillover can occur when a local firm improves its productivity by copying some technology used by multinational affiliates/corporation (MNC) in the local market. Another type occurs when local firms are forced to use existing technology and resources more efficiently, or to search for more efficient technologies, because an
This paper summarizes recent arguments/findings on two aspects of foreign direct investment (FDI): its correlation with economic growth and its determinants. The first part focuses on recent literature regarding positive spillovers from FDI while the second deals with the determinants of FDI. The paper finds that while substantial support exists for positive spillovers from FDI, there is no consensus on causality. On determinants, the paper finds that market size, infrastructure quality, political/economic stability, and free trade zones are important for FDI, while results are mixed regarding the importance of fiscal incentives, the business/investment climate, labor costs, and openness.
investment as efficiencyspillovers make private investment more profitable.
123. In addition to its positive impact on growth, FDI has been presented as a vehicle for strengthening South Africa’s international reserves. In its recent report, Standard & Poor’s underscores the need to improve the country’s ability to attract FDI to allow for a sustained improvement in South Africa’s weak external position. In recent years, the South African Reserve Bank (SARB), considering FDI resilient to swings in market sentiment, has used these flows to reduce the net open forward
This Selected Issues paper estimates an equilibrium path for South Africa’s real effective exchange rate. The paper briefly describes the dynamics of the real exchange rate and its determinants. It investigates the presence of a long-term relationship between the real exchange rate and certain explanatory variables, estimates the speed at which the real exchange rate converges toward its equilibrium level, and derives measures for the equilibrium real exchange rate. The paper also examines the real money demand, consumer prices, and the real exchange rate in South Africa.