The Impact of Foreign Direct Investment on Productivity Growth in the Ghanaian Manufacturing Sector

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Foreign Direct Investment (FDI) has been viewed as a major stimulus to economic growth in developing countries. Its ability to deal with two major obstacles, namely, shortages of financial resources, and technology and skills, has made it the centre of attention for policy makers in low-income countries in particular. It can impact the host economy through a variety of channels. Principally, it helps by adding to resources available for investment and capital formation. This study therefore aimed at examining the impact of foreign direct investment on productivity growth in the manufacturing sector of Ghana over the period 1979 to 2009 using the both quantitative and qualitative methods. The study used secondary data mainly from the African Development Indicators (ADI). The study used the Vector Error Correction (VEC) model to estimate the relationships. The speed of adjustment coefficient was found to be significant and showed that 53 per cent of adjustments towards the long run equilibrium are corrected in a given year. It was found that though FDI impacted productivity growth in the manufacturing sector, the impact showed a negative relationship. The negative impact of the FDI on the manufacturing sectors’ equation may be due to the fact that when divided into proportion the FDI goes to other sectors which may end up drawing resources from the manufacturing sector thereby resulting in a fall in their output. As a consequence, adjustment policies to redirect resources into the manufacturing sector will lead to improving the productivity in the sector.
A Thesis submitted to the Institute of Distance Learning, Kwame Nkrumah University of Science and Technology in partial fulfillment of the requirements for the degree of Commonwealth Executive Masters in Business Administration, June, 2011