Foreign Direct Investment and Economic Growth in Ghana

Abstract

The relationship between Foreign Direct Investment (FDI) and Economic Growth has been a topical issue for several decades. Policymakers in a large number of countries are engaged in creating all kinds of incentives to attract FDI, because it is assumed to positively affect economic growth. This paper investigates the effect of FDI on economic growth in Ghana. The paper, test for the presence of the long run linear relationship between FDI inflows and Economic Growth (GDP) for Ghana. The study employs various econometrics tools such as Dickey Fuller (DF) and Augmented Dickey Fuller (ADF) tests, Vector Auto Regression (VAR) and Johansen Co-integration test on time series data from the first quarter of 2001 to the fourth quarter of 2010. The results reveal that a long run relationship exists between the variables, and that FDI is positively related to economic growth in Ghana. Ghana should therefore continue to reform its economic and foreign policy to attract more investors which can help boost its economy.

Keywords: Foreign Direct Investment, Economic Growth, Vector Auto Regression (VAR), Co- Integration, and Unit Roots