Abstract
The role of institutions in both the inflow and the impact of foreign direct investment is of great im¬portance. The quality of institutions in a country can direct investment towards improving growth. This paper analyzes the individual and combined effect of foreign direct investment and institutions on economic growth in Ghana. The paper used the Auto Regressive Distributed Lag (ARDL) tech¬nique for secondary data obtained from 1995 to 2019. All data series, except for the quality institution index, were drawn from the World Bank Development Indicators. Institutional Quality Index data was obtained from the Heritage Foundation’s Economic Freedom Index website. The results of the ARDL model indicate that foreign direct investment and a quality institutional index together have a significantly positive effect on a country’s economic growth compared to their individual effects in both the short and long run. The study recommends that government policies should be aimed at attracting foreign direct investment while strengthening institutions and regulations to enhance output growth.
Highlights
Achieving economic growth is a macroeconomic objective that most economies seek to accomplish
The depend-ent variable, economic growth was measured as annual real GDP per capita, Foreign Direct Investment was measured by FDI net inflows, the capital was measured by gross fixed capital formation, labor was measured by population and the real exchange rate was measured as the Ghanaian cedi per United State dollar
A trend analysis between economic growth and foreign direct investment is plotted in Figure 1, followed by a presentation on the statistical characteristics of the variables employed in the study presented in Table 1 and the state of stationarity of the variables was tested using the Augmented Dickey-Fuller and Phillip-Perron tests
Summary
Achieving economic growth is a macroeconomic objective that most economies seek to accomplish. Investment being a key component of aggregate expenditure in any economy, is vital to growth through improved productivity levels and employment (Okwu, Oseni & Obiakor, 2020). Most developing countries are using the attraction of Foreign Direct Investment as a means to enhance economic growth. In 1983, the introduction of the Economic Recovery Programme (ERP) in Ghana comprised the attraction of FDI as another core objective. The Ghana Privatization Programme introduced in the 1990s as well as the establishment of the Ghana Investment Promotion Centre in 1994 are all significant efforts to magnetize investors (Yakubu, 2020). In the quest to position itself as a hub in West Africa for foreign investors, Ghana hosts summits annually known as the Ghana Investment Summit
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