A neoclassical investment function of the South African economy

Abstract

In this paper, investment is estimated to be consistent with a neoclassical supply-side model of the South African economy. In the neoclassical tradition, the model has to allow for profit-maximising or cost-minimising decision-making processes by firms, where supplyside factors such as taxes, interest rates and funding in the broader sense, play a significant role. Internal and external financial constraints have an enormous influence on South Africa's gross domestic fixed investment, as was demonstrated clearly by the vulnerability during, for example, the imposition of international sanctions against South Africa as well as during the East Asian and Russian crises. Therefore, in modelling gross domestic fixed investment for South Africa, it is necessary to incorporate the significant role played by financial constraints (internal and external) on investment.

Macroeconomic impact of Eskom’s six-year capital investment programme

“…This study considered the neoclassical approach (Jorgenson, 1963) in estimating the domestic investment function, since it incorporates all cost minimizing and profit maximizing decision making processes by firms. This approach has also been adopted in Du Toit, 1999;Du Toit and Moolman, 2004;Pretorius, 1998;and Akanbi and Du Toit, 2011. The long-run domestic investment function for South Africa is modelled as a function of output, user cost of capital, and capacity utilisation and is presented below as:…”