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

Topics: Investment, International economics, Foreign direct investment Pages: 27 (7578 words) Published: April 20, 2013

International Business Research

Vol. 5, No. 3; March 2012

The Effect of Investment Promotion on Foreign Direct Investment Inflow into Ghana Justice G. Djokoto Department of Agribusiness, Central Business School, Central University College P. O. Box DS 2310, Dansoman, Accra, Ghana Tel: 233-28-503-7399 Received: January 10, 2012 doi:10.5539/ibr.v5n3p46 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. Keywords: Foreign direct investment, Investment promotion, Trade openness, Inflation, Gross domestic product 1. Introduction Published: March 1, 2012

Accepted: February 15, 2012


1.1 Background
In recent years debate on the role of external resource inflows, including foreign direct investment (FDI) and their potential contribution to accelerating growth and progress towards reaching development goals in Africa has taken centre stage (UNECA, 2006). In line with the general trend of private capital flows in developing regions, FDI to Africa has been on the rise in recent years especially since the 1990s (Ndikumana, 2003; UNECA, 2006). FDI which refers to an investment made to acquire lasting interest in an enterprise operating outside of the economy of the investor (UNCTAD, 2002) is noted for the following benefits (de Mello Jr., 1997); Firstly, inward FDI can stimulate local investment by increasing domestic investment through links in the production chain when foreign firms buy locally made inputs or when foreign firms supply intermediate inputs to local firms. Secondly, the foreign capital inflow augments the supply of funds for investment thus promoting capital formation in the host country. Thirdly, inward FDI can increase the host country’s export capacity causing the developing country to increase its foreign exchange earnings. Fourthly, FDI is also associated with new job opportunities and enhancement of technology transfer, and boosts overall economic growth in host countries. A portfolio of activities through which governments aim to attract foreign direct investment (FDI) inflows constitutes investment promotion (Wells & Wint, 2000). These portfolio of activities include: advertising, investment seminars and missions, participation in trade shows and exhibitions, distribution of literature, one-to-one direct marketing efforts, facilitating visits of prospective investors, matching prospective investors with local partners, help with obtaining permits and approvals, preparing project proposals, conducting feasibility studies and servicing investors whose projects have already become operational. Some Investment Promotion Agencies (IPAs) do engage in granting incentives to foreign investors,...
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