View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by CSCanada.net: E-Journals (Canadian Academy of Oriental and Occidental Culture,... ISSN 1923-841X [Print] International Business and Management ISSN 1923-8428 [Online] Vol. 6, No. 2, 2013, pp. 121-130 www.cscanada.net DOI:10.3968/j.ibm.1923842820130602.1145 www.cscanada.org Accounting for Foreign Direct Investment in Ghanaian Economy Felix Kwame Aveh[a],*; Redeemer Yao Krah[a]; Philomina Dadzie[a] [a] Faculty of Accounting and Finance, University of Professional the people. Many of these emerging economies natural Studies, Accra-Ghana. resources, cheap labor availability, numerous business *Corresponding author. opportunities and ever-growing market for goods and Received 19 February 2013; accepted 15 April 2013 services. Governments of emerging economies begun to seek antidote to their developmental challenges despite the Abstract increasing flow of grants and other supports and one of these FDI inflows into Ghana have been identified to be lower alternatives that has proven to be the solution is the Foreign than other middle income countries; however, various Direct Investment (FDI). Where the doors of the country is empirical studies – including studies done in Ghana – opened widely to foreign investors who wants to investment have identified FDI to have a positive effect on economic and do business in the country. growth. This study sought to account for the effect of FDI has been regarded as having a positive influence FDI on economic growth using a two stage least square on the economic performance of host countries; most of econometrics analysis. A quarterly time series data these influences are believed to be in the form of positive spanning 2004 to 2011 for selected variables were used externalities which relate to the adoption of foreign for the econometric analysis. The results found FDI to technology and know-how, imitation, employee training, have a positive effect on economic growth but the effect introduction of new processes and products by foreign was found to be insignificant. Financial development firms, and the establishment of links between local and and exports growth were identified as having significant foreign markets (Alvaro et al., 2006). Empirical studies negative effects on economic growth. The researchers on the contribution of FDIs to economic development so recommend that Ghana reconsiders its liberal FDI policy far have been inconclusive. Although several studies have to ensure that FDI benefits the country immensely. found that FDI, or FDI in combination with other factors, has a positive effect on economic growth, other studies Key words: Investment; Arbitrage; Internalization; Productivity have found no significant effects, while a few have found that FDI could even have an adverse effect on a country’s growth (Asafu-Adjaye, 2005). Indeed, some scholars have Felix Kwame Aveh, Redeemer Yao Krah, Philomina Dadzie (2013). Accounting for Foreign Direct Investment in identified that for FDI to promote economic growth and Ghanaian Economy. International Business and Management, development, the host nation must possess absorptive 6 (2), 121-130. Available from: http://www.cscanada.net/index. capacities in order to benefit from such investments in the php/ibm/article/view/j.ibm.1923842820130602.1145 long term (Alfaro et al., 2006). Notwithstanding, there DOI: http://dx.doi.org/10.3968/j.ibm.1923842820130602.1145 remains substantial literature that continues to support the phenomenon that FDIs have positive significant effects on national economies (Kim, 2011). INTRODUCTION Foreign Direct Investment (FDI) in Africa has made an important contribution to the economic development of In recent years there has been a growing quest for improving the continent which has increased only modestly in recent the economic and social conditions of emerging economies, years. The contribution that FDI has made to economic in the face of the realization that dependent on grants, aids, development and integration into world economy has loans and other form of arms could not improve the lot of been widely recognised. Nevertheless the image of Africa 121 Copyright © Canadian Research & Development Center of Sciences and Cultures Accounting for Foreign Direct Investment in Ghanaian Economy among foreign investors still tends to be one of a continent whereas countries at the latter end of the development associated mainly with political turmoil, economic ladder give FDIs than they receive. instability, diseases and natural disasters (Owusu-Antwi, To understand the concept of FDI, it is important 2012). As a result of this, African countries have made to know what it entails. By definition, FDI refers to an considerable efforts over the past decade to improve increase in the book value of the total investment held their investment climate by liberalizing their investment in one country by investors from another country and regulations and offering incentives to foreign investors. managed/controlled by the investor (Graham, 1995). Like most countries in Africa, Ghana has experienced Todaro & Smith (2003) also note that most FDIs take some periods of political stability, coupled with a remarkable the form of subsidiaries of Multinational Corporations economic management programme spanning from the 1980s (MNCs) and that the parent corporation is the investor. and registering an average growth rate of 5% per annum, with Omoniyi & Omobitan (2011) also consider FDIs to amendments to the 1985 investment act code. The country represent “expansion of the international activities of is also well endowed with a number of natural resources MNCs” (p. 124). such as gold, bauxite and recently oil. Prior to the discovery Asafu-Adjaye (2005) also provides insights into of oil, FDI inflows into the nation has not been promising understanding the definition of FDI. He asserts that a (Owusu-Antwi, 2012); largely related to political instability foreign investor is a person/group/company that engages since independence until the late 1980s and early 1990s, in some form of productive activity in a country and funds the country remained unattractive to foreign investors who such activity from funds acquired from foreign sources. irrespective of the availability of investment opportunities Under his definition, he excludes foreigners who engage were more sceptical due to the perceived risks. Overtime in trade or other speculative activities and those who as political tensions eased from 1994 and democracy was engage in provision of temporal services. restored, the investment climate in Ghana has improved at Denisia (2010) also considers the definition of FDI a steady pace making it an attractive place for investment to from a macroeconomic view point, and indicates that FDI foreign investors. is “a particular form of capital flows across borders, from FDI inflows into emerging economies, including countries of origin to host countries, which are found in Ghana have increased significantly over the last decade the balance of payments. The variable of interest is capital with middle income countries benefiting a lot from such flows and stocks; revenues obtained from investments” inflows. Ghana achieved a middle income status in 2010 (Denisia, 2010, p. 54). and has therefore become more attractive for FDI inflows. 1.2 Theoretical Review of FDI Literature The discovery of oil in commercial quantities in the Ghanaian economy made the economy even more Various theories have been derived over the years to attractive for foreign investments. From experience with explain the concept of FDI; although, all such theories other African countries, Ghana is expected to experience have contributed to the field, there is no single universally an increase in FDI inflows (UNCTAD, 2012). The impact accepted theory in this field of study (Denisia, 2010). of these flows on economic growth (macroeconomic Some of the underlying theories include Vernon’s stability). equity capital, employment creation, and levels Production Cycle Theory, Theory of Exchange Rates of technology and skills within the economy have to be on Imperfect Capital Markets, Neoclassical Theory, studied. This study is designed to determine the effects of The Internalization Theory, Dunning’s Eclectic Theory, FDI on the economy of Ghana based on the determinants Keynesian Theory of Economics, Marginal Efficiency on of FDI. We investigate the trend of FDI into Ghanaian Investments (MEI) and Accelerator Theories (Denisia, economy from 2004 to 2011 and its the impact FDI on 2010; Kim, 2011). economic performance of the country in terms of GDP. 1.2.1 Vernon’s Production Theory Vernon (1966) developed the production theory to explain the type of foreign direct investments that US companies 1. LITERATURE REVIEW were making in Western Europe after World War II specifically in the manufacturing sector. In his theory, he 1.1 Definitions of Concepts identified four stages of production which he believed was a The concept of FDI has gained increasing dominance continuous cycle: innovation, growth, maturity, and decline. in economics and finance literature. As it is generally accepted that FDI’s plays positive roles in the development of a nation, many countries have undertaken policies that encourage the inflow of FDIs (Omoniyi & Omobitan, 2011). In fact, Alfaro et al. (2006) recognizes that net FDI moves from negative to positive as we climb the development ladder, hence less developed and Source: Denisia (2010)