Determinants of Foreign Direct Investment in Ghana

Abstract

The study sought to examine the factors that drive foreign direct investment inflows in Ghana. The quantitative approach to research was adopted for this study and secondary data was used. The data were mainly obtained from World Development Indicator and International Financial Statistics. Data was sampled for the period 1990 to 2018. Pearson’s correlation, Two-Stage Least Square (2SLS) Regression, and Granger causality were used as the estimation techniques. The study found that there was a positive relationship between human capital and foreign direct investment; between financial development and foreign direct investment, and between exchange rate and foreign direct investment. On the other hand, a negative relationship was found between interest rate and foreign direct investment, and between inflation and foreign direct investment. Furthermore, the study found that human capital, financial development and exchange rate positively affect foreign direct investment inflows in Ghana, but inflation had a negative effect on foreign direct investment inflows in Ghana. Again, a bidirectional relationship was found between human capital and foreign direct investment as well as between financial development and foreign direct investment. No causal relationship was found between FDI and interest rate, inflation, and trade openness. The study therefore recommends that economic policymakers must design policies that attract development-based foreign direct investments considering making effort to enhance financial development, human capital development, and maintain a stable price level and strong currency performance.