Determinants of fdi into the mining Sector in Ghana

Abstract

The study set out to examine factors that influence foreign direct investment inflows to the mining sector of Ghana. The study divided the broad objective into two. These were to examine the long run factors that affect foreign direct investment inflow and to investigate into the short-run factor that impact on foreign direct investment into the mining sector of Ghana. The study used quarterly time series data that spanned the period 1986 to 2012. Using Autoregressive Distributed Lag model (ARDL) or Bounds test approach to cointegration, long-run cointegration relationship was established between foreign direct investment to the mining sector and corporate tax, real effective exchange rate, consumer price index, real GDP per capita, Political instability, trade openness and infrastructure development. The study found that increase in consumer price index, political instability, depreciation of the real effective exchange rate results in a decline in the inflow of foreign direct investment both in the short-run and the long run. On the other hand, real GDP per capita and trade openness and infrastructure development had a positive effect. The causal relationship however, revealed that there is with the exception of political instability, there exist causal relationship between foreign direct investment and the other variables used in the study. The study recommend that, the government may consider providing enabling environment and policies that would foster GDP growth in order to increase inflows of foreign direct investment. Also, the central bank should target the depreciation of exchange rate and halt the increase in inflation by implementing right policies in order to increase the fortune of the economy in attracting FDI. Again, corporate tax should be reduced further to make Ghana’s mining sector a desire destination among resource rich countries in the sub-region.