The Effect of Investment Promotion on Foreign Direct Investment Inflow into Ghana

Abstract

The paper investigated the effect of investment promotion (IP) on foreign direct investment flow (FDI) into Ghana. Cointegration among the variables was established using auto regressive distributed lag (ARDL) models in the presence of a mix of I (0) and I (1) variables. The control variables, inflation and trade openness were statistically significant in the short run. Whilst inflation exerted a negative effect on FDI inflow; trade openness positively induced FDI inflow. GDP per capita and exchange rate did not statistically significantly influence FDI inflow in the short run. In respect of the key variable GIPC, in the short run, there was a positive but statistically insignificant effect on FDI inflow. The estimated long-run ARDL model showed that macroeconomic variables such as inflation, GDP and trade openness determined FDI inflow into Ghana. Notwithstanding the positive relationship between establishment of IP agency (GIPC) and FDI inflow, this relationship was statistically insignificant. Greater efforts at macroeconomic management specifically, promotion of external trade, increasing GDP and reducing inflation holds more promise to attracting FDI into Ghana. GIPC should be maintained to provide a supportive role when the foreign investors arrive in Ghana.