Determinants of Foreign Direct Investment in the West African Monetary Zone: A Case of Ghana

Abstract

This study examined the determinants of foreign direct investment (FDI) inflows in the West African Monetary Zone using Ghana as a case. The study covers the period 1980 to 2013. The Augmented Dickey Fuller unit root was used to check for the presence of unit root among the variables and the Johansen’s cointegration test was then used to check for the presence of long run relationships between the variables. Finally, vector error correction model was used to identify short run equilibrium determinants of FDI in Ghana. The findings of the study reveal that the significant determinants are Interest rate, interest rate lag two, exports and exchange rate which have a positive relationship with FDI and GDP, GDP lag two, imports, exchange rate lag two which have a negative relationship with FDI.  This study recommends that the countries of the WAMZ establish policies that would make the zone favourable to foreign investors such as the provision of financial subsidies. This study also advocates for the implementation of export promotion strategies and import substitution strategies.

Key words: Foreign Direct Investment (FDI), West African Monetary Zone (WAMZ), Ghana, cointegration, error correction model.