Impact of Foreign Direct Investment on Poverty in Ghana: A Johansen Co-integration Analysis

Abstract

In the past years, Ghana has witnessed a significant increase in Foreign Direct Investment which is expected to translate into transformative growth that reduces poverty and inequality; however, the country’s poverty and income inequality profile remain high. Foreign direct investment (FDI) and poverty research are important because FDI can have both positive and negative effects on poverty levels in host countries [1]. The positives imply that FDI can bring in capital, technology, and job opportunities, which can help reduce poverty by boosting economic growth and raising people's living standards. On the other hand, FDI can displace local businesses, exacerbate income inequality, and have environmental consequences that harm the poorest members of society. Understanding the relationship between FDI and poverty can assist policymakers and businesses in making informed decisions that promote inclusive and sustainable economic growth and reduce poverty. This study investigates the impact of FDI on poverty in Ghana using a 29-year data set from (1990 to 2018). Analysis was done using the Johansen Cointegration technique. The literature informed the variables used for this study. The Gini coefficient (which serves as a proxy for poverty and its parts of the FGT poverty indices family), foreign direct investment (FDI), GDP per Capita, exchange rate, trade openness, and inflation rate were all cointegrated. The results of the study showed that FDI, GDP per capita, inflation rate, and exchange rate widen the income inequality gap, hence, increasing the poverty incidence. In contrast, an increase in trade openness reduces the Gini coefficient implying a reduction in income inequality and poverty.