Can foreign direct investment lead to growth? The case of Ghana (1970-2006)

Abstract

Using an Error Correction Model and an annual time series from 1970 to 2006, the study examines the impact of Foreign Direct Investment (FDI) on economic growth in Ghana. The results indicates that FDI and openness of the economy have a negative growth impact while gross fixed capital formation positively impacts on growth both in the short-run and long run. The study therefore recommends that there is the need for efficient and effective policies to utilize FDI inflows and embark on export-oriented industrialization. Secondly, there is the need to increase public investment in productive sectors and also encourage private sector participation in economic activities. Also using the pairwise granges causality test, the study found a unidirectional causality from growth to FDI in the long-run in Ghana. The study therefore recommends that to attract more FDI, there is the need to increase income.