ABSTRACT
The study examined the effects of exchange rate movement on foreign direct investment (FDI) inflows into Ghana. Specifically, the study examined the trends in FDI inflows and exchange rate in Ghana, investigated the impact of exchange rate volatility on FDI inflow and determined the impact of FDI inflow on exchange rate volatility. The study also examined the impact of economic growth on FDI inflows to Ghana. For the purpose of this research, secondary data sourced from World Development Indicators (WDI, 2018) was used. The study adopts a quantitative methodology framework and specifically employs econometric technique (Auto- Regressive Distributed Lag Models) to investigate the interrelationship between FDI and exchange rate in Ghana using two models. Stationarity test done using the Augmented Dickey Fuller (ADF) and Philips Perron tests reveals that the variables under study were stationary at the levels and first difference hence justifying the use of the Auto-Regressive Distributed Lag Models (ARDL). The ARDL technique to cointegration reveals a long run relationship among the variables for both models. The long run results reveal a negative and significant impact of real effective exchange rate movement on FDI. Similarly, FDI had a negative and significant impact on real effective exchange rate movement. However, in the short run real effective exchange rate although negatively related to FDI had no significant impact on FDI. In addition, lag 1 of real effective exchange rate had a positive and significant impact on FDI. Also, in the short run FDI was negative however, not significantly related to real effective exchange rate. The estimated ECM coefficients of -0.703 and -0.489 for models I and II reveals that about 70.3% and 48.9% of the errors in the short run are corrected in the long run. The study therefore recommends that government should create the necessary environment that would be favorable for foreign investors.
CHAPTER ONE INTRODUCTION
Background of Study
Foreign Direct Investment (FDI) refers to the establishment of production facility in a country other than the home country of the investor in question (Blonigen, 2005). According to Alfaro et al. (2004), the World Bank defines FDI as the summation of equity capital as well as other long – term capital and short-term capital, which are shown in the balance of payment.
In recent times, Foreign Direct Investment (FDI) has become a major source through which developing countries rely to expand their economy. The Organization for Economic Co- operation and Development (OECD) stated in its Third Edition Benchmark Definition of FDI (BD3) as “FDI reflects the objective of obtaining a lasting interest by a resident entity in one economy in an entity resident in economy other than that of the investor” (OECD, 1996, p7). Notwithstanding the above, Foreign Direct Investment (FDI) has become a centre of debate with regards to it contribution towards economic development. However, some researchers posit that, FDI does not make any significant impact on the host country’s economy growth, pointing to the fact that, growth of an economy depends on the host country economic and prudent measures instituted to accelerate economic growth. For instance, according to (De Mellow, 1996; Herzer et al.,2008), FDI may affect economy through reducing investment opportunities for local investors or depleting the scarce resources of the host country.
There has been diverse views with regards to the contribution of FDI to the development of emerging economies, some scholars argued for the need for consistent call for increased effort to attract more FDI hinges on the ideology that FDI has several positive impacts which include
productivity gains, technology transfer, the introduction of new processes, managerial skills and competence, and know – how in the domestic market, employee training, international production networks, and access to markets (Caves R., 1996). Three major factors also contribute to the reasons why some countries receive more FDI than other countries are, recipient country policies (including applicable regulation to FDI), measures adopted by countries to encourage and facilitate investments and finally general economic characteristics (Sane, M. 2016).
Existing literature works and researchers have demonstrated that, FDI contribute immensely towards economic growth of host country. FDI has become a global investment portfolio through which countries across the globe are shafting their focus in order to enhance and promote sustainable economic growth. According to the United Nations on Trade and Development (UNCTD, 2015), the increase of FDI in some countries has been interpreted as a sign that openness of Africa to the international trade could lead to quick “economic renaissance” at the continental scale. Even the world most powerful economies like the USA, China, UK, Russia, Japan and Germany have deeply relied on FDI to sustain their economy. The flow of FDI to developing countries and the world at large has experience a persistent decline over the years. Africa suffered a dramatic decline in FDI inflows from $ 19 billion in 2001 to $ 11 billion in 2002. In view of the dramatic downturn, the region’s share of the global FDI flows fell from 2.3% to 1.7% (UNCTD, 2003). However, inflows of FDI around the world increased to $ 916 billion, with more than half of these flows received by businesses within developing countries in 2005, (UNCTD, 2005). The Ghana Investment Promotion Centre(GIPC) stated in their third-quarter report for 2015 that “…the provisional FDI projects registered by the GIPC for the first nine months in 2015 had reached 2.0 billion US dollars out
of the total of 2.29 billion US dollars, worth of projects in Ghana”. This indicates that FDI contributed 87.34 percent out of total registered projects in Ghana within the period. This amount captured projects registered with the centre by foreign investors; an 18 percent increment (GIPC, 2015) Provisional Foreign Direct Investments (FDI) figures for Ghana from January to September has hit 1.3 billion dollars (GIPC 2018). In recent years, FDI flows to Ghana have been increasing steadily, up to 2016. However, in 2017, inflows of FDI declined by 6.6% from 3.5 to 3.2 billion dollars. Ghana has been ranked as the 4th largest recipient of FDI in Africa which sees its stock of FDI rise from $ 29.9 billion to $ 33.1 billion between 2016 and 2017 (77.5% of GDP in 2017), UNCTAD (Global Investment Report 2018).
