The influence of Foreign Direct Investment (FDI) on the economic growth of Ghana (1992-2014)

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The impact of foreign direct investment (FDI) on the economic growth of host economies has attracted significant debate in the literature with empirical evidence being inconclusive. Ghana FDI inflow has shown mix trends over the year. This paper aims to study the relationship between FDI and economic growth in Ghana for the period 1992-2014 using time series data. The data used in this study was mainly secondary data collected from the period, 1992 to 2014 consisting of yearly observations for each variable. The real GDP growth and foreign direct investment net inflows as percent of GDP (FDI ratio) data were taken from the World Banks World Development Indicators 2014 The study employs the cointegration, Vector Error correction Model (VECM) and the Granger causality testing to empirically examine the relationships and directional relationships between the variables. The study establishes that a long-run equilibrium and causal relationship exists between the dependent variable; Real Gross Domestic Product and the independent variables under consideration namely, Trade openness, Interest Rate, Inflation and Government Size. It was determined that in the short-run, effects of FDI, Trade Openness, Inflation and Interest Rate volatility on RGDP are significant while the Government Size volatile on RGDP is nearly imaginary. The significance of the FDI variable in the equation is an indication the FDI affects the macroeconomic economy. As a consequence, FDI promotion policies should be adjustment to bring more investment to the country which then translates into high economic growth in the Ghanaian economy. Future research in this area should focus on the impact of FDI on the various sectors of the economy in Ghana. This builds on the findings on this study and helps inform policy makers in shaping FDI polices for the various sectors of the economy.
A thesis submitted to The Department of Economics in partial fulfillment of the requirements for the award of Master of Science in Economics,