Foreign Direct Investment, Trade Openness and Economic Growth: Evidence from Ghana

Abstract

This article investigates the relationship among foreign direct investment, trade openness and economic growth in Ghana taking the period of post-liberalization covering 1975-2017. The Augmented Dickey-Fuller (ADF) test for unit root, regression analysis, descriptive analysis, and Pearson correlation was used to investigate the relationships. ADF test for unit root result shows all variables to be integrated of order one, that is they are stationary after the first difference. The study extracted and used secondary data sources derived from the World Development Indicators (WDI) of the World Bank and Bank of Ghana website over the period 1975-2017. The study proxied foreign direct investment, inflation, and trade openness were used as an independent indicator while GDP growth (annual %) was the dependent indicator. Using the Ordinary Least Squares (OLS) estimator, the study revealed that trade openness is the main factor affecting GDP growth (annual %) in Ghana. Also, the study finds that foreign direct investment and Inflation had (−, or +) impact but were not statistically significant on GDP growth (annual %). Therefore, the study concludes by recommending robust measures to enhance trade openness in terms of encouraging exports and inflow of FDI through the creation of an enabling and friendly environment to do business for output growth dynamics in Ghana.

How does quality of institutions affect the impact of trade openness on economic growth of Ghana?

“…In achieving the objectives of the study, the following null hypotheses are tested: (i) trade openness has no significant effect on economic growth of Ghana, (ii) quality of institution has no significant effect on economic growth of Ghana and (iii) quality of institution and trade openness have no complementarity effect on economic growth of Ghana. The study contributes to past literature pertaining to trade openness and economic growth in that, past studies, especially on Ghana (see: Adams & Atsu, 2014;Adu, 2013;Asiedu, 2013;Ehigiamusoe & Lean, 2018;Khobai et al, 2018;Mireku et al, 2017;Nketiah et al, 2019;Oteng-Abayie & Frimpong, 2006;Sakyi, 2011;Sakyi et al, 2015a) in attempt to assess the impact of trade openness on economic growth of Ghana ignore quality of institutions as a variable in the analysis and as a result fail to examine how quality of institutions influence the impact of trade openness on economic growth. Therefore, this study contributes to literature by incorporating this issue in the analysis.…”

“…Similarly, Nketiah et al (2019) examine the relationship between foreign direct investment, trade openness and economic growth using annual time series data covering the period 1975-2017. Employing the ordinary least squares as estimation technique, the study finds that trade openness exerts a significant positive impact on economic growth whereas inflation (foreign direct investment) has insignificant positive (insignificant negative) effect on economic growth.…”

“…In view of that, scholars have empirically researched the impact of trade openness on economic growth both in Ghana and in other parts of the world. Some of the authors report that trade openness impact positively on economic growth (see: Barlow, 2006;Iscan, 1996;Makun, 2017;Mireku et al, 2017;Nketiah et al, 2019;Nugent, 2002;Sakyi, 2011) whiles others posit that trade openness has a negative or insignificant impact on economic growth (see: Adams & Atsu, 2014;Adhikary, 2011;Adu, 2013;Akpan & Atan, 2016;Razin et al, 2003;Stensnes, 2006). These conflicting (inconclusive) outcomes continue to linger and hence calls for further research to fill the knowledge gap.…”

Trade Openness, Inflation and GDP Growth: Panel Data Evidence from Nine (9) West Africa Countries

“…Various studies have used different variables and approaches in finding the determinants of GDP growth. Nketiah et al [10] estimated Foreign Direct Investment on Trade Openness on Economic Growth: Evidence from Ghana from 1975 to 2017. The analysis was based on time series which indicated that trade openness is a main factor affecting Economic growth.…”

Panel Data Analysis of Relationship Between Economic Growth, Foreign Direct Investment, Exchange Rate and Trade Openness in Newly Industrialized Countries

“…They found that the variables were cointegrated. Olabisi and Lau (2018) Nketiah, Cai, Adjei, and Boamah (2019) searched the effects of FDI, trade openness on GDP growth for Ghana throughout 1975 and 2017 using different techniques and found that the main factor affecting economic growth is trade openness in Ghana. Wiredu, Nketiah, and Adjei (2020) created a panel for four West African countries covering the years 1998-2017 and investigated the link between economic growth, FDI, and trade openness, and found a positive and significant relation between the variables.…”