Economics Project Topics

The Effect of Foreign Direct Investment on Economic Growth Over a Period From (1995 to 2019)

The Effect of Foreign Direct Investment on Economic Growth Over a Period From (1995 to 2019)

The Effect of Foreign Direct Investment on Economic Growth Over a Period From (1995 to 2019)

Chapter One


  1. To ascertain the impact of FDI on economic growth in Ghana.
  2. To ascertain which FDI-impacted sector has significant effect on the economic growth in Ghana.




This section gives the various definition of FDI, trends of world FDI inflows, trends of Africa and Historical background of FDI in Ghana, trends and sectoral flows of FDI in Ghana.


FDI is the system whereby an investor obtains an asset with the motive of managing the productive activities of the firm in an economy outside the investor’s home economy (Moosa, 2002). FDI is defined as an investment whereby an investor acquires a significant interest in a firm operating in an economy outside the investor’s home economy (OECD, 2012). A direct investor is able to exert an influence in the management of the firm however it does not necessarily mean that he has absolute control over the firm. FDI is considered as an ownership or control of not less than 10 percent stake in an enterprise (Griffin & Pustay, 2007).


Greenfield investment where a new facility is either built or there is an expansion of existing facilities (Ball & Mc Cullochs, 1999). It also seen as a kind of investment that involves in complete developing of new asset (Meskerem, 2014). This is primary target of a host countries promotional efforts. It augments production capacity, jobs and technological transfer.

Merger and acquisition are where by a partial or total sale of control of an existing local business is acquired by the foreign business (Ball & Mc Cullochs, 1999). Merger is when two companies come together in their quest to self-assist financially and increase growth of the business without necessarily developing another asset or unit. With acquisition, the foreign business completely buys the local business and hold full ownership of the business. This cross-border acquisition would lead to operation and asset control transferred to the foreign business by the local business making the local business an affiliate of the foreign business (Varghese, 2015). Joint Venture is established when a foreign business combines with a local business to form a corporate body. A foreign business and the government of the recipient country can come together to form a unified body.

Horizontal FDI is where a company replicates its operation and activities in the host country. Here the foreign business establishes a subsidiary in a similar sector in the recipient economy as it finds itself in its own country of origin. Horizontal FDI is readily utilized in place of exports to get around trade barriers like import tariffs (Helpman, Melitz & Yeaple, 2003). The Bulk of FDI globallly takes the form of horizontal FDI.

Vertical FDI is defined as foreign firms investing in a business that plays the role of a supplier or a distributor. Here different stages of production process can be segmented into different economies. Every country partake in the whole production process. The end products are then sent to the final assembly place. It is beneficial because it takes advantage of the difference in international prices of inputs such as labour, raw materials among others.

Foreign direct investment was previously viewed as unhelpful, negative and bring inappropriate technologies into developing countries. It was also views as a medium for foreign dominance in the host countries, a threat to national security and a form of neo colonization. As a result of that most countries initially implemented import substitution strategy as a tool for economic growth.

However, there has been major changes over the past three decades towards the way most governments initially viewed foreign direct investment into their home countries. Recent governments all over the world have shown interest in attracting foreign direct investment by liberalizing their FDI regime, though at different periods and time frame. Governments now see FDI as a vehicle by which technology transfer and capital injected into the country. FDI is now been competed for by countries both developing and developed. Investment policies have become more lenient than it used to be some decades ago. This shows good indications of countries’ interest in attracting foreign direct investment in national and regional level. Investment policies have been lenient across countries because governments have realized that it can attract more inflows of FDI as a result of that. Foreign investors also invests more in countries that have good economic basics such as market share and growth trajectory, relevant skills, infrastructure and local technological capabilities to ensure that their investment in the host countries are productive. 





This page opens with a discussion on the models and econometric technique employed in examining the giving data. It then proceeded with the discussion of the variables chosen for the research, the sample and the origin of data, highlighting the dependent and the independent variables.




This chapter proffers a comprehensive analysis and detail-oriented results of the models described in the preceding chapter. This chapter begins with the presentation of the stationarity tests and further discussions on the results. The findings and deliberations of the bounds tests are presented. The briefly discussed long and short-run dynamics of the model, including the error correction model is as well presented.




The section comprises of summarized findings, an ending and recommendation dependent on the outcome of the study.


The core purpose was to determine the impression of FDI on economic growth in Ghana. The study further investigates which FDI impacted sector affected growth in Ghana.

A PP and ADF tests were conducted to ascertain stationarity of all variables. Results from both test showed that Government Spending and FDI inflows to the service sector were stationary at level or integrated at I(O)whiles the rest of the variables were stationary at first difference or integrated at I(1).

This made it suitable to use the bounds test to check for co integration for both models. The results of the first model showed that no association exist in the long term. Therefore a simple ARDL model would be employed to ascertain association in the short time period. The second model showed that an association exists in the long term therefore a long and short run relationship was established for the model. Regression from both models were free from issues of serial correlation and heteroskedasticity.  They were both normally distributed. The model was also stable.

Results of short run relationship from the first model indicated significance amongst the variables at either 5% or 1% confidence level. FDI and Government Spending showed a direct relationship to GDP whiles inflation and trade openness showed an adverse relationship to GDP. The current level of trade openness showed an adverse and significant relation to GDP, whereas the second lag of trade openness was direct and significant.

The results for the second model showed that FDI inflows to both agricultural and manufacturing sector has a direct and significant impact on economic growth in both long and short run. FDI inflows to service sector showed a direct and significant impact on economic growth in the short run and a adverse and insignificant impact in the long run.


This study adds to literature that FDI has a direct short run impact on economic growth. Also FDI inflows to agricultural and manufacturing sector shows a direct effect on economic growth however, the manufacturing sector has higher effect on economic growth than agricultural sector. FDI in service sector shows an ambiguous effect on economic growth.


Policy makers should re align policies towards attracting more FDI into the country. FDI inflows into the country should be channelled towards improving agricultural and manufacturing sectors. This can be done when infrastructure needed to boost productivity of these sectors are put in place. This would lure investors to invest more in these sectors. Also investors coming into these sectors must be gives investment incentive in order to increase FDI inflows to these sectors.


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  • Abdul-Aziz, I., Baba, A., Babamu, D.H. (2015), “The influence of Foreign Direct Investment on the productivity of the Industrial Sector in Ghana”, International Journal of Academic Research in Accounting, Finance and Management Sciences, 5(3), 1-13 
  • Accounting, Finance and Management Sciences, Vol. 3, No.1, January 2013, pp. 18–25
  • Adams S. (2009). Foreign Direct investment, domestic investment and economic growth in
  • Alfaro, L., (2003), “Foreign Direct Investment and Growth: Does the Sector Matter?” Working Paper, Harvard Business School.
  • Antwi, S. & Zhao, H. (2013), “Impact of foreign direct investment and Economic Growth in Ghana: A co integrational analysis”, International Journal of Business and Social Research, 3(1), 64-74.
  • Antwi, S., Atta-Mills, E.F. E., Atta-Mills, G. & Xicang Z., (2013), “Impact of Foreign Direct Investment On
  • Asafu -Adjaye, J., (2005), “What has been the impact of foreign direct investment in Ghana”, Institute of Economic Affairs Publication IEA, 2005, Accra, Ghana
  • Asiedu, E., (2002), “On the Determinants of Foreign Direct Investment to Developing Countries: Is Africa Different?” World Development, 30 (1), pp.107-19.
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