LIST OF ACCRONYMS USED
ADB Agricultural Development Bank
BCC Bank for Credit and Commerce
BED Bank Examinations Department
BHC Bank for Housing and Construction
BOG Bank of
BSD Bank Supervision Department
C Cedi
DFI Development Finance Institution
ERP Economic Recovery Programme
FI Financial Institution
FINSAP Financial Sector Adjustment Programme
FSAC Financial Sector Adjustment Credit
GCB Ghana Commercial Bank
MBG Merchant Bank
NBFI Non Bank Financial Institution
NIB National Investment Bank
NPA Non Performing Asset
NPART Non Performing Assets Recovery Trust
NSCB National Savings and Credit Bank
SCB Standard Chartered Bank
SDCI Securities and Discount Investments
SSNIT Social Security and National Insurance Trust
SSB Social Security Bank
TB Treasury Bill
MNC Multinational Corporation
UNCTAD United Nations Conference on Trade And Development
1.0 Introduction
The concept of sustainable economic growth presents an immense challenge for policy makers especially in developing countries. The issues underlying the concept of economic growth have become even more distinct in the prevailing era of globalization where business processes and decisions have become a “global” trait as opposed to the historical national traits. With globalization, there has been increased deregulation and liberation of international markets that has led to increased trade and international investment across boundaries of countries.
Up until the late 1980s, most of the developing countries relied on bilateral and multilateral donor assistance (Overseas Development Assistance – ODA) as a source of project development finance. The decade between 1990 and 2000 witnessed a remarkable and consistent decrease in development assistance to developing countries that forced them to search for alternative and sustainable sources of financing. Subsequently, by 1998, foreign direct investment had emerged as the largest source of capital for developing countries rising from US$174 billion in 1992 to US$664 billion. To date, the growth in foreign direct investment shows that sustainable growth for several developing countries is progressively being influenced by multinational enterprises (MNEs) through foreign direct investment flows.
Thus, attracting foreign direct investment has become very crucial for most countries because of its perceived positive impact on economic growth and development. Many countries have undertaken structural and regulatory reforms such as privatization of state enterprises, liberalization of their foreign exchange markets and establishment of fiscal incentives like tax holidays in order to attract more foreign direct investments.
The quest by developing countries for increased foreign direct investment stems from the assumption that foreign direct investment leads to economic benefits within the host country, which assumptions are based on economic theory. In addition, there is existing empirical research that has further highlighted the benefits of foreign direct investment. According to World Bank, developing countries should endeavor to attract more foreign direct investment because; it encourages production improvements, contributes to the advancement in technology, boosts employment opportunities, bolsters business sector competition and creates exports.4 In their article “Foreign Direct Investment and Sustainable Growth” Fortanier and Maher (2001) indicate that foreign direct investment through multinational enterprises is an influential and effective means to propagate technology from developed to developing countries. Fortanier and Maher further indicate that foreign direct investment is habitually the only source of innovative and new technologies.
1.1 PURPOSE OF THE STUDY
The primary objective of this study is to establish a robust causal direction between foreign direct investments and economic growth for
· To establish whether the increase in foreign direct investments in
· To establish whether increased economic growth in
· To establish whether there is a bi-directional relationship between foreign direct investments and economic growth in
1.2 MOTIVATION OF THE STUDY
Conventional economic theory especially the endogenous growth theory and a number of empirical studies support the notion that there is a causal relationship between foreign direct investments and economic growth and that foreign direct investment inflows enhance growth in host countries. For example Moran (2002) indicates that foreign direct investment is beneficial to host countries because it avails a consolidated package of quality control practices, management skills, human resource and marketing techniques and improved production procedures all of which place the host country’s economy along the frontiers of best practice.
Because of its presumed benefits to the host country economies, proponents of foreign direct investments such as the World Bank and International Monetary Fund strongly encourage countries to attract more foreign direct investments as a way of stimulating and increasing efficiency of resource allocation. Nonetheless, there are other theories and empirical studies which indicate that there is a reverse causation from economic growth to increased foreign direct investments. Some authors further caution that there are several risks and repercussions to host countries associated to foreign direct investment inflows such as “crowding out” – which is the apparent domination of the domestic economy by the foreign companies leading to decreased competition and in some instances monopoly of the domestic economy by the foreign firm(s). Other risks and negative impact could include; reduced investment as a result of financial and capital resource drains, hindrance of capital formation, increase in unemployment and the possibility of brain drain from the developing countries to developed countries.
The existing empirical evidence on the causal relationship between foreign direct investment and economic growth and the associated benefits is very inconclusive. Most of the empirical research that has been undertaken in this area has used panel data for a number of countries to establish the causal relationships. There is therefore limited exhaustive country specific research studies to establish the causal relationship and interaction between foreign direct investment and economic growth. Chowdhury and Mavrotas (2005) proposed that individual country studies be carried out to ascertain this causal relationship. This thus provides a major incentive for this study. For
In addition, Obwona (2001) used a combination of qualitative and quantitative. However, the use of qualitative responses presents major challenges because of the inherent subjectivity of responses and the limitations of incorporating such responses in econometric models. This study is quantitative and uses time series data for the period 1970 to 2005. The data is analysed using robust statistical models; ordinary least squares and the Granger causality test. The findings of this study therefore add to the existing body of literature, are a valuable guide to especially policy makers and are a source of reference for future scholarly research.
1.3 Overview of Globalization
In the last fifteen years the main focus of the United Nations Conference on Trade and Development (UNCTAD) has been to closely monitor the global trends in investment flows, economic integration coupled with the direction of national and international policy orientations in this regard. Trade liberalization and investment has being the main driving force in the ongoing rising trends in the development of national as well as international investment policies. Suffice to cite the UNCTAD World Investment Report 2001, which sought to among other things assess the relations between international MNCs and their indigenous counterparts. Arguably, depending on the viability of the relationship existing between them, according to the report will provide a favorable assessment of the expected impact FDI can have on the economy of the host country.
In recent times there has being strong evidence to prove that foreign direct investments have provided the main lubrication to keep the wheels of globalization running. It is on record that gross foreign direct investments increased by 18% by the year 2000 to reach a sum of USD $ 1.3 trillion (World Investment Report, 2001). This figure is definitely higher than some of the conventional economic aggregates such as global production, trade and capital formation. Within this same period, the industrialized nations led by the United States, Japan and the European Union accounted for a little over 70% of global inflows coupled with an additional a little over 80% of foreign direct investment outflows (World Investment Report 2001). Unfortunately, developing economies did enjoy a similar glamorous trend as the industrialized economies in view of the fact that the share of foreign direct investments that flowed into developing economies declined from the 1994 record of 42% to an abysmal 19%[1].
1.4 Globalization and Capital Mobility
Developing countries drew useful lessons from the financial crisis that rocked some parts of Latin America and
Thanks to globalization, foreign direct investment has received premium attention from policy makers and governments in developing countries. The effects and inflows of foreign direct investment on the economies of developing countries is not uniformly distributed. If measured in relative terms it is evident that there is an astonishingly increasing level of the favorable response some low income economies have suddenly become attractive destinations for capital investments. Among the various schemes put in place to enhance the mobility trend is the unprecedented level of liberalization of regulations, macroeconomic environmental security, fiscal incentives, financial promotions and a host of others
Having said this, the foregoing point cannot be treated in isolation to the direct impact the traditional determinants also play in this process. Once more, globalization has introduced a new dimension to the foreign direct investment discourse. It is now evident that MNCs are no longer solely motivated by the conventional market-seeking approach to capital investments. Increasingly, attention is now being tilted to the capacity of the domestic industry to competitively engage in the global terrain. Consequently, to address this lapse there is an urgent need to develop immobile local assets so as to create the relevant competitive edge in the global quest to attract foreign direct investments. It should be noted that doing this will amount to an uphill task.
In the light of this therefore, there should be a deliberate effort to shift attention from the over reliance on foreign direct investment as a tool for achieving economic development. Arguably, the formation of capital will continue to feature prominently on national issues. This is where there can be a link between foreign direct investment and other types of capital inflows. The fact still remains that notwithstanding this subtle linkage in most cases is not self-evident and other extreme cases it is not very distinct.
1.5 Overview of Foreign Direct Investment
It is on record that foreign direct investment increased by almost fifteen folds from a modest USD $ 55 billion in 1980 to an unprecedented USD $ 865 billion by the year 2000 (IMF, 2000). Undoubtedly, there is good reason to say that this radical increase in foreign direct investment amounts to globalization of some kind. What is even striking is that the increased effect was felt in both real and absolute terms; overall these figures are a representation of 3% of global exports covering the period of 1980-1985. Apparently, exports played a central role in shaping the scope of globalization due to foreign direct investment. Available figures indicate that in the late 1990s global foreign direct investment flows constituted 10% of gross fixed capital formation. The figure recorded for that period was 2% higher than what was recorded in the latter part of the 1980s (UNCTAD, 2000). The deduction that can be made from this is that capital formation continues to feature prominently on the national agenda of many countries.
For instance, the question of foreign direct investment and its role in economic development was an issue exclusively attributed to the very developed economies[2]. With the advent of globalization, developing countries have also become very keen players in the global demand for foreign direct investment. According to the UNCTAD 2000, report developing countries received an average annual inflow of foreign direct investment that had increased by eightfold by way of comparison between the mid 1980s and the latter 1990s. There is little doubt that in terms of significance of foreign direct investment developing countries possess a greater need than their counterparts in the developed world.
Speaking in relative terns once again, the figure recorded for the late 1990s is a representation of 10% of gross fixed capital formation (UNCTAD, Various Issues). For developing countries, total inward foreign direct investment recorded in 1998 represented 20% of their GDP. Within the context of the current boom in foreign direct investment, there are a good number of gainers of which the South East Asian economies are viewed more favorably as far as their capacity to attract and contain foreign direct investments are concerned. Meanwhile, sub Saharan Africa is woefully behind in terms of their collective capacity to attract and maintain foreign capital. Take as an illustration, sub Saharan
1.6 Significance of Globalization and Foreign Direct Investments
Indeed, foreign direct investment inflows remain an important barometer that guides the direction and orientation of the development and implementation of economic policies and strategies of governments in these regions. It is also common knowledge that foreign direct investment inflows provide badly needed capital to finance domestic activities creating the platform for the transfer of technology and technical know-how for the host country. There is no doubt that these factors are indispensable prerequisites that can lay the foundation for the integration of developing economies into the global economy as part of the overall drive towards economic development.
Evidence from recent developments indicate that FDI’s [3]serve as an important factor in marshalling the much needed resources to facilitate the ongoing transformation taking place in the countries that were once upon a time administered along the command structured economic systems. It also plays a defining role in galvanizing the most essential resources needed to develop the infrastructural bases in these regions to enable them meet up with productive relevance in the rapidly globalizing competitive global economy. In the early days of the transition process, Lane (1994), in a study of the transition campaign in
Despite the rapid pace of foreign direct investment inflows into these regions the average gains was woefully below the figures recorded in other regions of the world particularly in comparison to developing countries, which had reportedly recorded an overall figure of a little above 30% (Agarwal, 1995). Regrettably, an attempt to conduct any exhaustive analysis of foreign direct investment inflows into the transitional regions of
It is a known fact that every multi national corporations’ decision to extend its activities abroad is most often than not motivated by a number of factors which always have cost reduction as the main defining character. Most firms will be influenced by what Dunning (1977, 1981) dubbed as “ownership,” “location,” and “internalization” (OLI)[4] incentives that are available in the would-be host country. The scope of these factors are so widely sparse, however a significant chunk of it boarders on research and development potential, human capital availability, marketing assets, reputation and brand names (Hymer, 1976, Dunning 1977).[5] Apart from the traditional considerations under the firm location category, a series of independent variables also influence the response of individual Multi National Corporation. For instance, a horizontally producing MNC engages in the production of goods and services across all the operating countries. The reason for such a move can include, but not limited to the aim of avoiding huge costs associated with transportation, tariffs and quotas[6], that have to be encountered in the process of reaching the target market from the production site. It is worth noting that within the limited scope of this paper, I will develop my analysis on the premise that would-be Multi National Corporations come into these markets already equipped with the above stated factors. Such an assumption simplifies the complication of proving theories that has been exhaustively dealt with by previous studies relating to the subject, (See Markusen, 1995, for in-depth discussion).
The direct opposite holds true for vertically oriented Multi National Corporations who carry out their relocation process in progressive stages. In any case, like the horizontally inclined MNC, the vertically oriented MNC also has cutting down total cost of production as the primary goal. Vertical investments are also in line with differences in factor endowments inherent in would-be host countries. Suffice to cite an illustration, a typical Multi National Corporation may choose to transfer any part of its production process to a country that has a relatively abundant cheap unit cost of labor and also has the capacity to readily meet this need. Similarly, it may also move to yet another location that can offer it a competent team of technical expertise, in other words locations that can make available an enormous skilled-labor work force (Markusen & Venables 1998).
1.7 The Role of Foreign Direct Investments
Over the years foreign direct investments have served as viable channels through which a host country can benefit from the transfer of capital investments coupled technologies with the possibility of opening up the domestic market to international players and vice versa. There is no doubt that a vital ingredient for economic growth for developing countries lies in their ability to integrate into the world economy as prelude to receiving all the advantages that comes with it. For instance, the productive capacities of developing countries are in a spiral state of dormancy and this is precisely where the role of foreign direct investments is needed to change the ugly trend. There is also no doubt that the advent of globalization has not augured well for developing nations; thus making it more imperative to embark on a deliberate shift of policy gears that can create the framework for the wholesale attraction of foreign direct investments into the developing world to be complemented by the prudent usage of the foreign direct investment.
Moreover, the fact still remains that the advent and impact of globalization has come to stay and therefore it is imperative for policy makers to place high premium on the need to strategically take advantage of all that there is in the package. A critical review of the foreign direct inflow pattern reveals a peculiar trend that will be discussed in this study. To begin with, it is interesting to note that amongst the top ten highest recipients of foreign direct investment posses a generally robust and open economy, in the same vein where there is a deficiency in the above provision it is most often than compensated by the presence of abundant natural resources. There is also a general tendency of looking at the question of geographical concentration of FDI flows; another issue that will be discussed exhaustively as the paper advances. In any case, the flow and trend of foreign direct investments is an essential indicator for policy makers at all levels of the planning process.
1.8 Introduction of the Research
A retrospective look at the scope and trend of FDI inflows into developing countries in the last three decades reveals an unusually high convergence FDI in favor of the economies of
The inflow and pattern of FDI into developing countries have followed an irregular pattern spanning a period predating the early 1980s. However, the trend witnessed an upward rise during the mid part of the 1980s to a colossal sum of approximately over $280 billion by the mid 1990s (World Bank 1997, see appendix for further details). One of the reasons for the irregularity in the trend is largely due to the declining private capital inflows during the period[7] but on the whole official flows maintained a somewhat steady trend.
Developing countries' share of external financial inflow accounted for just a meager 12% of the global whole during the 1970s. For a number of reasons, total lending by the major international banks and financial institutions declined during the decades following largely due to a general loss of confidence in the capacity of borrower nations to repay. This hesitation was strengthened by the ugly debt crisis that engulfed developing economies during the period in question.
Meanwhile, the situation took a rapid change following the heels of innovative financial instruments and technologies that characterized the post debt crisis period. Among these innovative measures were vigorous financial and market integration and rapid economic integration. Consequently, by the mid 1990s developing countries together attracted a little above 34% of global FDI; amidst a stunning 13% increase in portfolio equity within this same period.
Low income economies generally received and maintained a relatively higher level of private capital flows in comparison to the middle-income countries. Among other things, the middle income economies suffered a devastating setback from the 1982 debt crisis and indirectly from the Mexican crisis did followed a decade later. Understandably, low income countries during the period lacked the fundamental institutional capacity to contract such huge loans besides their domestic financial systems were not adequately developed to engage in such grandiose investments.
Taking
Notwithstanding all these gains, low income economies continue to woefully lag behind in terms of the magnitude and quantity of foreign direct investment that they receive. To this end, one of the major goals of this study is to look at the immediate and remote factors accounting for this chronic abysmal trend. Naturally, the most immediate answers that can be cited when such a question is posed will be the usual rhyming of the traditional factors such as general structural weaknesses; market efficiency and size; technological limitations; inadequate skilled manpower and a host of others. Without necessarily, disregarding these factors as potentially being capable of pinning down the progress of developing countries as far as their quest to attract FDI is concerned, it is also the view of this study that there should be some deep seated covert hindrances that have probably being overlooked by both policy makers and academia.
It is against this background that focusing on the FDI phenomenon in
1. The current political and legislative environment in
2. There has being significant progress in the overall macroeconomic environment in the last decade;
3. There is a long standing history of favorable FDI centered policies;
4. These notwithstanding, the economy of
In view of these, most of the conclusions that will be arrived at will share direct and significant resemblances with what is currently going on in a good number of low income economies.
1.9 Research Problem
The attraction of foreign direct investments constituted a cardinal policy of the government of
Moreover, a critical assessment of available statistical information reveals an irregular pattern in the flow of foreign direct investment. Take for instance, during the 1989-1994 period
Consequently, the purpose of this study is pose a number of prying questions about Ghana’s quest to attract foreign direct investment as well as its implications on the domestic economy. It is against this background that the following questions below will constitute the thrust of the research problem:
I) In view of all these, where can
II) What are the most immediate policy orientations needed to enhance
III) How can the government of
Below are the main dependent variables of this study:
I) The annual inflow of foreign direct investment into the various sectors of the economy as a percentage of GDP.
II) The available legal and policy frameworks that target foreign direct investments either directly or indirectly.
The main independent variables are also stated below:
I) The annual growth of GDP.
II) Viability of the financial system (exchange rate).
III) Population and demographic features.
IV) Annual trend of inflation.
V) Unemployment.
The hypothesis of this study is presented below:
I) Using GDP as an economic indicator provides a verifiable proof of a government’s successive ability to effectively manage the macroeconomic structures of the nation.
II) The choice of population here means that a high population provides a potentially huge labor force coupled with the provision of a large market base for the investing MNC in the host country. In the same vein, on the demographic scale, chances are that an MNC will not be enthused by a potential country that has a greater percentage of its population being rural based.
III) The exchange rate pattern is an indication of the level of economic stability present in the host country.
IV) Unemployment provides a picture of the economic viability of the host country.
2.0 Research Aim
The principal aim of this research is to conduct an exhaustive study of the state of foreign direct investment in
Having done this, the research will provide policy recommendations as a way forward in the process of attracting higher volumes of foreign direct investments that will be in consonance within the economic integration framework of the ECOWAS protocol.
A great deal of literature abounds on the relationship between economic development and foreign direct investment in developing countries. A good number of researchers have also chosen to holistically study the most immediate impediments to the flow and success of foreign direct investment in developing economies. Among the most conspicuous impediments identified include, legal regime[9], vibrancy of the financial systems, corruption and ineffective corporate governance systems. Nonetheless, political instability, and the tax regime are also poignant issues worth considering in this study.
This research will be an addition to the ongoing discussions as practical presentation of the phenomenon of foreign direct investment within the Ghanaian context. This study unlike most studies conducted on the topic of foreign direct investments in
2.1 Research Questions
The research will seek to provide answers to the following questions:
· Within the broader framework, is there any impact of foreign direct investment on the economies of host countries in the developing world?
· Taking cognizance of the abundance of natural resources in
· Barring all unforeseen circumstances, how can the government of
· In view of the macroeconomic policy prescriptions required under the enhanced HIPC initiative, will
· Is the so-called policy of foreign direct investment-led growth well designed to facilitate significant increases in exports for
· What is known about the main contemporary socioeconomic, corporate and financial problems facing
· What are the latest research issues about
2.3 Literature Review
The subject of FDI and its inflows into the transition economies has been extensively discussed in a wealth of literature from both policy circles and academia. As a result, there is an acclaimed consensus on what constitutes the main determinants of FDIs in the transition economies of
Studies on the relationship between economic performance and FDI inflows into the individual transition economies has been established by way of highlighting the glaring performance differences between the CEE and the CIS (Borensztein et la 1998; Barrel & Holland, 2000; Meyer & Pind, 1999; Konings, 2000).
Notwithstanding the foregoing, the quantity and depth of literature dedicated to the empirical study of FDI in transition economies is very limited in scope. In many ways this can be said to be a reflection of either all or one of the following reasons:
I) A noticeable lack of detailed sectoral data;
II) Incomplete time series data;
III) Inconsistent time series data.
For instance, Lansbury et la (1996) has made an encouraging effort in exploring the As of recent, a number of scholars have been attracted to the deliberate usage of the panel data technique as a way of overcoming the previous weakness in conducting empirical studies of FDI inflows into LDCs. One shining example is Holland & Pain (1998), who used the technique to study a total of eleven CEE economies spanning a period of 1992-1996. To some extent, the striking innovation in their work is based on how they favorably view privatization, labor costs, proximity, and trade linkages as viable stimulants of FDI inflows. Bevan & Estrin (2000), also used the panel data set to identify FDI inflows from a number of source economies into ten CEE economies and the
To this point, the works of Kinoshita and
Consequently, the prime objective of this study is to fill the gap in the current discourse on the subject of FDI inflow into developing countries with
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[1] Among all the 49 low income countries of which African economies constitute 34 of these continue to lag behind in the global quest to attract foreign direct investments. As at the close of the year 2000 they only accounted for a marginal 0.3% of the global share of foreign direct investments. According to the UNCTAD World Investment Report 2001, there was a decline of USD $ 1 billion in total foreign direct investment that came into the region.
[2] Current world records still estimates that developed countries continue to be the leading recipients of foreign direct investments.
[3] According to the IMF’s definition of direct investment as contained in its Balance of Payment Manual, is the sector of international investment that is a reflection of the long term objective of securing a sustainable interest by a direct investor in an enterprise in another economy. It is often characterized by an over 10% ownership of ordinary shares backed by strong voting rights.
[4] Markussen (1995), presents a concise critique of the OLI concept.
[5] The firm-specific advantages espoused here constitute the intangible and tangible determinants of cost-cutting factors of production, as part of the overall process of firm ownership.
[6] Put together these factors bloat up the cost of trade, hence horizontal investment becomes the inevitable alternative especially when the MNC sees the size of the market to be too large to be ignored. It should be noted that in the classical case of factor determinants of FDI inflows, market size has always played a significant role in catalyzing the decision of an MNC.
[7] Private capital flows went through a couple of radical increments especially in the period 1975-1981 closely followed by another one witnessed in the early 1990s. On both occassions increase in oil revenue and general FDI account for both the former and latter trends respectively
[8] The government of
[9] This has to do with all aspects of governance that pertains to the judiciary and questions of independence, the enactment and implementation of legislations, the protection of intellectual property rights, privatization laws.
