Foreign Direct Investment (FDI) Inflows into Ghana: Should the Focus Be on Infrastructure or Natural Resources? Short- Run and Long -Run Analyses

Abstract

This paper conducts a time series analysis of annual data set from 1980-2010, to study the potential determinants of FDI inflows to Ghana. The paper used modern econometric methodology which includes unit root testing, and co-integration analysis. Both the long-run and short run determinants of FDI were analysed using the Vector Error Correction Model (VECM). The VECM also enabled the researchers predict the speedy with which the short- run and long- run disequilibrium is corrected. The robustness of the estimated coefficients was investigated and found to be robust. The research reveals that infrastructural development and political stability have long-run positive and significant impact on the level of FDI inflows in Ghana. The study further established FDI targeting Ghana to be predominantly resource seeking for now. The short-run estimate for natural resources is positive and significant. However, Ghana cannot continue to rely on its natural resources to attract FDI as the long-run relationship is negative. Factors associated with market and efficiency seeking FDI such as market size, and value of the cedi were either found to be insignificant or unstable coefficients on inflows. Political instability is found to significantly deter inflows implying that strengthening of democratic institutions can bring in economic dividends by serving as a driver of FDI. The state of infrastructure is found to be below the required level necessary and sufficient to serve as a driver of inflows hence the negative short term effect. The policy implication of this finding is that for Ghana to fully realize its potential as far as foreign direct investment inflows is concerned it needs to embark on massive investments in infrastructure.