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

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