UNU-WIDER Foreign Direct Investment and Trade in the Southern African Development Community

We use a modified gravity model to estimate the relationship between trade and foreign direct investment (FDI) in the Southern African Development Community (SADC). We find evidence of a significant causal relationship from SADC’s exports to inward FDI. Distance (reflecting remoteness and transport costs) and political instability are confirmed to be significant determinants of FDI to SADC. We discern differences in the patterns and determinants of FDI to SADC, whether it is from the USA and UK or from continental Europe. In the case of FDI to SADC from the USA and UK, it is exports from SADC to these countries that are significant, and not imports, while, in the case of continental Europe, both exports and imports are significantly associated with FDI to SADC.