The Influence of Foreign Direct Investment (FDI) on the Productivity of the Industrial Sector in Ghana

Foreign Direct Investment (FDI) and its impact on the growth of host economies has been widely researched but yet to produce a conclusive empirical result. A number of researchers have therefore moved the analysis to sectoral level in terms of the heterogeneity in the way FDI affects the various sectors of the host countries’ economies. The industrial sector is one of the sectors that have received considerable attention in the sectoral paradigm. In the case of Ghana however, the studies on the impact of FDI on the industrial sector are limited and the only study available is restricted to the exporting manufacturing firms in Ghana. We therefore studied the impact of FDI on the performance of the entire industrial sector in Ghana. More importantly, our study of the industrial sector in Ghana which includes the mining & quarrying as well as the oil & gas sub-sectors makes our study more meaningful since FDI to Africa has been argued in the literature to be driven by extractive minerals. Our time series data cover the period 1980 – 2013 and we used the Johansen cointegration test for the estimation of our model. We found FDI, trade openness and gross fixed capital formation to have significant long run positive effects on the performance of the industrial sector in Ghana. We also found that exchange rage exerts significant negative effect on industrial sector performance in the long run. We recommend that policy makers should make foreign ownership of enterprises in Ghana in the industrial sector more appealing to potential and existing investors. The government should work at strengthening the Cedi against the major trading partners as the continuous depreciation of the currency hurts businesses in the planning of payments and receipts denominated in foreign currency. Companies should invest in high quality plants and machines to enhance productivity. Trade relations with other countries should also be improved and fortified as trade openness contributes to the growth of the industrial sector.