Effect of Foreign Direct Investment on Economic Growth: The Role of Natural Resources and Trade Openness in Ghana.

Abstract

This study examined the determinants of foreign direct investment in Ghana over the period 1980 – 2017 to highlight the need for FDI to reduce our growing debt levels by reducing replacing public loans. To estimate the empirical model, the study controlled for exchange rate and inflation rate as measures of macroeconomic instability, as well as the growth rate of citizen’s income. The study employed time series analysis considering the nature the variables be annual series. Using the Augmented Dickey-Fuller (ADF) approach, the study tested for the presence of unit root adopted the Johansen Cointegration test for long run associations among the variables. The VAR and VECM models were finally estimated to achieve the objective of the study. Outcome indicated a positive relationship between natural resource availability and FDI inflows in the short-run and long-run in Ghana. Trade openness was also revealed to have a positive impact on FDI inflows in the country in both time periods. Measures of macroeconomic uncertainties such as exchange rate and inflation rate exert negative impacts on FDI inflows. Results of the study holds several policy implications including the need to achieve a sustainable economic outlook thus achieving and sustaining lower levels of inflation that will less deterrence to foreign investors. Also, the exchange rate needs to be managed in order to achieve an appreciation of the Ghana-Cedi against the US-dollar to encourage foreign direct investment and trade amongst Ghana’s trade partners. Again, further trade restrictions that are deemed unproductive can be reviewed to allow free trade, especially the Africa Continental Free Trade Area (AfCFTA).