Modeling the nexus between coal consumption, FDI inflow and economic expansion: does industrialization matter in South Africa?

Abstract

This study examines the role of industrialization in the energy-growth-FDI nexus for the case of South Africa using data over the period 1970 to 2018. The empirical exercise was conducted using Pesaran Autoregressive Distributed Lag (ARDL) bounds testing approach. To accomplish our study objective, we analyze stationarity properties of the series using the unit root test after which we applied Bayer-Hanck (B-H) combined technique to cointegration to assess whether a long-run relationship exists among the series. Empirical results show that a 1% change in FDI account for 0.002% and 0.013% increase in economic expansion in the short- and long- run respectively. Also, a 1% increase in coal consumption influence GDP negatively by 0.083% and 0.207% in the short and long run respectively. Furthermore, a 1% increase in total natural resource rent positively affects GDP by 0.02% and 0.05% respectively in the short and long run. Industrialization, on the other hand, demonstrates a positive and significant impact on the economic growth process both in the short and long run. Industrialization contributes 0.506% and 1.274% to economic expansion both in the short and long run respectively. The causality tests suggest that a one-way causal link running from FDI to industrialization and from industrialization to coal consumption exists. Finally, FDI inflow drives total natural resource rents in South Africa. This study also gives reliable growth and energy policy proposals to policymakers applicable to countries around the globe.