Foreign Investment Lifts South Africa’s Growth, but the Jobs Gap Persists

Foreign capital can finance factories, bring new technology and connect businesses to international markets. None of those gains guarantees that enough people will find work. South Africa's persistent unemployment makes this gap difficult to ignore: an economy can attract investment while struggling to turn it into broad gains in income and opportunity.

In "The Role of Foreign Direct Investment and Unemployment in South Africa's Economic Growth," published in Economies, University of Limpopo researchers Livhuwani Nenngwekhulu and Ndivhuho Eunice Ratombo examine how foreign direct investment, joblessness, exports and fixed investment relate to economic performance between 1998 and 2024. Their findings offer qualified support for foreign investment as a contributor to growth. They also show a stronger negative association between unemployment and growth, placing the labour market at the heart of the investment debate.

Capital Inflows Offer a Qualified Growth Dividend

The researchers used 27 years of annual World Bank data and a statistical model designed to distinguish shorter-term changes from longer-term relationships. Alongside foreign direct investment and unemployment, they included exports and gross fixed capital formation, which captures spending on long-lasting productive assets. Examining these measures together gives a more useful account of growth than looking at investment inflows in isolation.

Foreign direct investment has a positive coefficient in the study's long-run estimates, but the result meets only the 10% threshold for statistical significance. This is weaker evidence than the conventional 5% threshold used for many empirical findings. The researchers themselves urge caution: the estimated relationship does not establish that foreign investment causes growth, because stronger growth could also attract investors.

The short-run pattern is less straightforward. A rise in foreign investment is positively associated with growth in the current period, while its lagged associations are negative. The model cannot explain which projects produce lasting benefits or why the relationship changes over time. For an investment agency, the implication is clear enough to investigate: the value of a deal cannot be judged solely by the size of the initial inflow.

Investment may raise output through equipment, expertise and access to markets without generating much direct employment. Its wider effects depend on whether domestic suppliers can participate, workers have the required skills and infrastructure allows firms to operate reliably. The study discusses these conditions as possible explanations for South Africa's experience, though it does not directly test their individual effects.

Unemployment Is More Than a Social Indicator

The study finds a negative long-run association between unemployment and growth that meets the 5% significance threshold. In practical terms, the two have moved against each other in the researchers' model, even after accounting for the other variables included. The finding is more firmly supported statistically than the positive foreign investment result, but it still describes an association rather than a one-way causal effect.

Weak growth can suppress hiring. High unemployment can also limit household purchasing power and leave skills and productive capacity unused. Because both processes may operate at once, the findings cannot tell policymakers how much additional growth a specific employment programme would generate. They do, however, challenge any assessment of investment success that treats job creation as a secondary outcome.

The difference is crucial, especially where new projects employ relatively few people directly. A capital-intensive investment could improve output and exports while offering limited opportunities to a large pool of job seekers. It does not make such investment worthless: reliable infrastructure or more productive industries may bring indirect benefits. It makes the employment pathway a question that governments should examine rather than assume.

South Africa's labour-market barriers also extend beyond the availability of vacancies. The authors identify skills mismatches, spatial inequality and constraints on business activity among the possible obstacles to broader participation. Their model cannot establish which barrier is most important, or whether a given foreign investor could realistically overcome it. Those questions require evidence at the level of firms, sectors and places, where decisions about hiring and sourcing actually occur.

Exports Strengthen the Case for Productive Capacity

Exports show a positive long-run association with growth at the 5% significance threshold. The result is consistent with the prospect that access to external markets can support domestic production. It does not establish that every export industry delivers comparable gains, or that expanding exports will necessarily reduce unemployment. The kinds of goods produced and the local activity supporting them remain important unanswered questions.

The finding points toward a connection between investment promotion and export competitiveness. Foreign investors may bring access to international customers, while domestic firms need dependable power, transport and logistics to fulfil orders. Improving those conditions could benefit businesses regardless of ownership. The study supports examining that connection, although it does not calculate the return on any particular infrastructure reform.

Gross fixed capital formation presents a less certain picture. Its long-run coefficient is negative, but the estimate is not statistically significant at the conventional 5% threshold. It would be a mistake to conclude from these results that spending on equipment or infrastructure damages growth. The finding instead leaves open a more useful question: whether capital spending is being converted into assets that firms can use productively.

The researchers suggest that inefficient allocation and infrastructure constraints could help explain the result. Those possibilities warrant scrutiny, not a verdict based on this model alone. For governments and development lenders, measuring whether projects reduce operating costs, improve reliability and enable further private investment would be more informative than measuring expenditure alone.

Judge Investment by What It Enables

The study considers foreign capital and unemployment within the same account of South Africa's growth, while distinguishing short-run from long-run patterns. Its time span captures periods of substantial economic disruption, including the global financial crisis and the COVID-19 pandemic. This breadth makes the question relevant to present policy, but 27 annual observations also leave limited room to untangle the effects of multiple variables and shocks.

The authors acknowledge that their analysis does not directly include institutional quality or the economy's capacity to absorb investment benefits. Nor can national figures reveal whether gains accrue to particular regions, industries or groups of workers. The results apply to South Africa and should not be treated as a numerical forecast for other developing economies. They offer a policy warning rather than a universal formula.

For governments, that warning argues for assessing proposed investments against more than committed capital: supplier opportunities, skills development, employment prospects and the conditions needed for projects to operate effectively all deserve attention. Development agencies can help evaluate those outcomes over time. Businesses and civil society can contribute evidence about which opportunities reach local firms and workers, and which remain out of reach.

Forthcoming research should follow investments into specific industries and regions, compare job creation with indirect supplier effects, and test how infrastructure and workforce skills alter the results. Such work could help distinguish investments that expand output alone from those that also widen participation.