The Effects of Governance Type and Economic Crises on Foreign Direct Investment Inflows in Ghana

DOI10.1177/0015732517734026
AuthorThelma Mensah,Joseph Kwadwo Tuffour
Publication Date01 May 2018
SubjectArticles
The Effects of Governance
Type and Economic
Crises on Foreign Direct
Investment Inflows in
Ghana: Evidence from
1960 to 2015
Joseph Kwadwo Tuffour1
Thelma Mensah2
Abstract
Global foreign direct investment (FDI) flows have increased rapidly over the last
few decades. However, Ghana has not attracted much of this FDI. Investors are
driven mostly by profit maximization and hence decisions to invest in an unfamiliar
territory are often based on the economic and political conditions of this new
territory. The current study investigates the effect of the state of governance
and economic crises on FDI inflows to Ghana. Using time series data from 1960
to 2015, Vector Error Correction Mechanism results show that democratic
governance has the tendency to positively influence FDI inflows while periods
of economic crises are likely to reduce FDI inflows to Ghana in the long run.
Depreciation of the Ghana Cedi reduces FDI inflows but market size has a
positive influence on FDI inflows. Increase in labour skills and the level of openness
have positive effects on FDI inflows. In the short run, economic crises in the
last three years have negative effects on present FDI inflows while democratic
governance in the past year positively influences FDI inflows. It is recommended
that democratic governance should be maintained to enhance FDI inflows.
Also, efforts to avoid economic crises especially institutional shocks absorbers
are key to maintain FDI inflows to Ghana.
JEL: P33, P45, E02, O55
Keywords
Governance type, economic crises, foreign direct investment, Ghana
Foreign Trade Review
53(2) 63–80
2018 Indian Institute of
Foreign Trade
SAGE Publications
sagepub.in/home.nav
DOI: 10.1177/0015732517734026
http://journals.sagepub.com/home/ftr
Corresponding author:
Joseph Kwadwo Tuffour, University of Professional Studies, Accra P.O. Box LG 149, Legon-Accra, Ghana.
E-mail: jktuffour@yahoo.co.uk
1 University of Professional Studies, Legon-Accra, Ghana.
2 Ghana Institute of Management and Public Administration, Achimota-Accra, Ghana.
Article
64 Foreign Trade Review 53(2)
Introduction
Foreign direct investment (FDI) has been viewed as a major stimulus to economic
growth in developing countries. Its ability to deal with two major obstacles,
namely shortages of financial resources, and technology and skills, have made it
the centre of attention for policy makers in low-income countries (Abdulai, 2005;
Tsikata, Asante, & Gyasi, 2000). However, the positive effects of FDI may vary
in their magnitudes depending on the quality of the business environment in the
host economy, the socio-political atmosphere and the state of the economy in
general (Abdulai, 2005; Melnyk, Kubatko, & Pysarenko, 2014).
In the period between 1960 and 1965, Ghana witnessed an upward trending of
FDI inflow. This was attributed to the desire of the government at the time to
industrialize the country rapidly to be at par with other developed countries. This
attracted foreign investment into the country but investment dropped when the
government was overthrown (Abdulai, 2005). From 1966, periods of military
coup which ousted elected governments witnessed decreasing shares of FDI
inflows in GDP. Between 1970 and 1980, net FDI inflows as a percentage of GDP
average around 0.5 per cent with the highest share recorded in 1975, which were
about 2.12 per cent and a sharp drop to –0.3 per cent in 1976. Between 1980 and
1992, FDI inflows as a percentage of GDP were low, averaging around 0.1. The
trend analysis of net FDI inflows is depicted in Figure 1 from 1960 to 2015.
The situation, however, changed after Ghana has become a democratic repub-
lican in 1992 which is observable from the somehow undulating trend between
1994 and 2005. A striking observation from the figure above, however, is that the
trend in FDI seems not to have been affected negatively by the Global Financial
Crises experienced in 2007/2008. In 2008, FDI was about 9.5 per cent of Ghana’s
GDP, one of the highest performing figures ever recorded.
Most researchers understand the economic determinants of FDI inflows as it
has been well researched over the years (Tuffour, 2010). The literature has indi-
cated that FDI inflows are determined by market size, degree of openness, the role
Figure 1. Foreign Direct Investment Net Inflows as a Percentage of GDP (1960–2015)
Source: Authors’ development based on Ghana Statistical Service and World Development
Indicators data.
–2
0
2
4
6
8
10
12
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
FDI as a % of GDP

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