The Effects of Exchange Rate Movement on Foreign Direct Investment (FDI) Inflows into Ghana

Abstract

The study examined the effects of exchange rate movement on foreign direct investment (FDI) inflows into Ghana. Specifically, the study examined the trends in FDI inflows and exchange rate in Ghana, investigated the impact of exchange rate volatility on FDI inflow and determined the impact of FDI inflow on exchange rate volatility. The study also examined the impact of economic growth on FDI inflows to Ghana. For the purpose of this research, secondary data sourced from World Development Indicators (WDI, 2018) was used. The study adopts a quantitative methodology framework and specifically employs econometric technique (Auto- Regressive Distributed Lag Models) to investigate the interrelationship between FDI and exchange rate in Ghana using two models. Stationarity test done using the Augmented Dickey Fuller (ADF) and Philips Perron tests reveals that the variables under study were stationary at the levels and first difference hence justifying the use of the Auto-Regressive Distributed Lag Models (ARDL). The ARDL technique to cointegration reveals a long run relationship among the variables for both models. The long run results reveal a negative and significant impact of real effective exchange rate movement on FDI. Similarly, FDI had a negative and significant impact on real effective exchange rate movement. However, in the short run real effective exchange rate although negatively related to FDI had no significant impact on FDI. In addition, lag 1 of real effective exchange rate had a positive and significant impact on FDI. Also, in the short run FDI was negative however, not significantly related to real effective exchange rate. The estimated ECM coefficients of -0.703 and -0.489 for models I and II reveals that about 70.3% and 48.9% of the errors in the short run are corrected in the long run. The study therefore recommends that government should create the necessary environment that would be favorable for foreign investors.