This paper investigates the link between foreign direct investment (FDI), democracy and economic growth on a panel of eight Southern African countries for 1980–2014 using the system generalized method‐of‐moment (GMM) estimator. We find that FDI has a direct positive effect on economic growth and that strong democratic institutions are a significant driver of economic growth in the sample countries. The impact of FDI on economic growth is dependent on the level of democracy in the host countries. This implies that countries with strong democratic institutions are better able to absorb the positive spillovers from FDI. In policy terms, Southern African countries should sustain the institutional reform policy agenda already in place in order to benefit more from the significant inflows of FDI.

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We propose a solution to address the observed negative sign on the marginal cost variable in new Keynesian Phillips curve estimations. Our solution is based on an elaborate speci…cation of the cost function faced by …rms and the formulation of a reduced-form production function which is characterised by non-linear input-output relations. The resultant Phillips curve features the standard hybrid expectational term, labour share, output gap, speed-limit e¤ects and supply shock variables. In general, GMM estimations of the model for developed and emerging markets yield a positive and signi…cant coe¢ cient on the labour share and the output gap. We conclude that supply shock variables are essential to the empirical validity of the cost-based Phillips curve.

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