Foreign Direct Investment, Government Expenditure, and Economic Growth in Ghana

Abstract

Foreign direct investment and government expenditure are some of the key economic variables which policy makers attempt to influence to induce economic growth. In this study, the main objective is to examine the impact of these macro-economic indicators on the economic growth of Ghana for the period 1992 to 2015. A dynamic ordinary least square techniques was used in analyzing data using real GDP growth rate to measure economic growth. The results indicate that a 1% increase in foreign direct investment will lead to about 6% increase in economic growth of Ghana but a 1% increase in government expenditure only leads to about 5% increase in economic growth. Also, in this study, exchange rate, trade percentage of GDP, net taxes and technological advancement were adopted as control variables. The results from the analysis indicated that exchange rate, net taxes and technological advancement had a positive relationship with economic growth whiles trade percentage of GDP had a negative relationship with economic growth. As part of policy recommendation, the study suggests that the government engages in more bilateral and multilateral trade agreements and strengthen the fight against corruption so as to instill more confidence in foreign investors in order to attract more foreign direct investment. Also, to further enhance growth, the government must ensure that its spending is directed to productive economic activities such as the construction of good roads linking rural communities to urban areas, the provision of affordable but quality health care and investing in the education sector.