Essay On Fdi And Its Determinants In Ghana

Ghana is a developing country with 7235.44 Crores USD (in 2020). In the last few years, Ghana was rapidly growing. Within 2017-2019, Ghana's growth reached 7% which was halted by the COVID-19 pandemic. However, this economy handled this negative shock strongly with support from strong domestic demand and the high prices for key exports and thus it is predicted that within the end of 2022, this economy can reach a 5.5% GDP growth rate (World Bank Data 2022). This discussion is focused on analyzing the trend in FDI in Ghana and the explanation of that trend with the help of relevant FDI theory. 

 

Some empirical research that aimed to find out the determinants of FDI in a country found that foreign direct investment in a country is a key component of GDP or it can be said that there is a two-way relationship between these two variables. FDI in a country means more capital available to fuel domestic projects which implies more employment generation and high economic growth. A high and stable GDP also attracts FDI from foreign companies as a high and stable GDP growth ensures a high return to investment with certainty. In other words, stability in the economic growth rate boosts confidence among the investors.  It is evident from the comparison of the trend of FDI inflow to Ghana and the GDP of the same. Not only GDP, some other domestic economic factors such as interest rates, exchange rate, inflation rate and foreign exchange reserves (Asiamah, Ofori, and Afful 2019). To show this comparison between FDI and its determinants the data from 2000 to 2020 has been collected and analyzed. 

 

 

Figure 1: FDI trend in Ghana

 

From studying the above trend in FDI inflow, it can be understood that FDI inflow fluctuates from time to time. It is showing an inverted U-shaped curve within this period. Since 2005 FDI continued to rise sharply for 3 years but after 2008, the value of FDI has been fluctuating a lot but showing a falling trend overall. The COVID-19 pandemic also affected the same in 2019 and onwards. 

 

Figure 2: GDP trend in Ghana

 

The GDP of Ghana within 2000-2020 does not show any clear trend as it fluctuates from one year to another, especially up to 2005. Comparing both graphs it can be seen that the FDI flow peaked in the year 2008. In the same year, a high GDP was also achieved in this country. After this year, both the GDP and FDI started declining. The increase in FDI from 2010 to 2011 is reflected in the increase in GDP within the same period. Again both of these variables experienced a decline for 2 years until FDI started to rise gradually in 2013. The impact of this increase can be seen in the increase in GDP of Ghana since 2015. After this country experienced a covid-19 pandemic, both of these variables declined by a high proportion from 2019 to 2020. Thus, it can be said that the GDP of this country is unambiguously positively related to the FDI inflow in this country. The other determinants of FDI from the context of Ghana are discussed below: 

 

Figure 3: Foreign Reserves in Ghana

 

The foreign reserve in this country is upward sloping which means, the other countries are investing in this country and/or the country has a huge potential in its exporting sectors from which the foreign exchange reserve is increasing in volume. When other countries invest in an economy, it signifies higher potential in that host economy which encourages other investors to invest in that country. Thus, the overall positive trend in FDI is explained by a positively sloped foreign reserve curve in Ghana. 

 

Figure 4: Inflation Rate in Ghana

 

High and unstable inflation rates discourage investors to invest in a country. A high inflation rate implies the real value of a certain amount of money is decreasing at an increasing rate. If this inflation rate is unstable there is increased risk in investing in this country as the error terms related to the expected inflation rate are more likely to be high. Since 2001, the inflation rate has been more or less controlled in Ghana which predicts a positive trend in FDI. Thus, the overall positive trend in FDI can also be explained by the stable inflation rate in Ghana. 

 

Not only these factors but also infrastructure and government policies affect FDI inflow in a country. The government of Ghana has established some special economic zones where foreign companies get some tax cuts and other advantages which helps them to grow in a foreign market with fewer complications. This also influenced the FDI in this country (Abille et al 2020). 

 

Figure 5: Exchange rate in Ghana

 

Both theoretical and empirical research found a negative relationship between the FDI inflow and the exchange rate of a country. The exchange rate of a country is defined as the amount of domestic currency traded for one unit of foreign currency. It has been seen in various countries that an appreciation of domestic currency attracts FDI in the economy whereas a depreciation of the same results in declining FDI inflow. A high value of a currency means the country has enough foreign reserves, and the economy is stable. Thus, foreign companies will start investing in that currency. However, Ghana's case does not go with this theory. It can be seen that despite the continuous rise in the exchange rate or depreciation of Ghana's currency the FDI in Ghana has an overall upward trend which is contrary to the prediction of the previous research. One possible explanation of this contradiction is that the impact of increasing exchange rate has been offset by the positive effect of the other determinants that is although the exchange rate has been rising the increasing GDP or foreign reserves, as well as the suitable business environment created by government's policies, convinced the investors in high return from investment in this country. Thus, the discussion concludes by analyzing the trends in FDI in Ghana along with explanations of the same with relevant factors.

 

Abille, A.B., Mpuure, D.M.N., Wuni, I.Y. and Dadzie, P., 2020. Modelling the synergy between fiscal incentives and foreign direct investment in Ghana. Journal of Economics and Development.https://www.emerald.com/insight/content/doi/10.1108/JED-01-2020-0006/full/html

 

 

Asiamah, M., Ofori, D. and Afful, J., 2019. Analysis of the determinants of foreign direct investment in Ghana. Journal of Asian Business and Economic Studies.https://www.emerald.com/insight/content/doi/10.1108/JABES-08-2018-0057/full/html

 

 

World Bank Data, 2022. Foreign direct investment, net inflows (% of GDP) - Ghana | Data. [online] Data.worldbank.org. Available at: <https://data.worldbank.org/indicator/BX.KLT.DINV.WD.GD.ZS?locations=GH> [Accessed 9 July 2022].

 

 

World Bank Data, 2022. GDP growth (annual %) - Ghana | Data. [online] Data.worldbank.org. Available at: <https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=GH> [Accessed 9 July 2022].

 

 

World Bank Data, 2022. Inflation, consumer prices (annual %) - Ghana | Data. [online] Data.worldbank.org. Available at: <https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?locations=GH> [Accessed 9 July 2022].

 

 

World Bank Data, 2022. Official exchange rate (LCU per US$, period average) - Ghana | Data. [online] Data.worldbank.org. Available at: <https://data.worldbank.org/indicator/PA.NUS.FCRF?locations=GH> [Accessed 9 July 2022].

 

 

World Bank Data, 2022. The World Bank in Ghana. [online] worldbank.org. Available at: <https://www.worldbank.org/en/country/ghana/overview> [Accessed 9 July 2022].

 

 

World Bank Data, 2022. Total reserves (includes gold, current US$) - Ghana | Data. [online] Data.worldbank.org. Available at: <https://data.worldbank.org/indicator/FI.RES.TOTL.CD?locations=GH> [Accessed 9 July 2022].