The Effect Of Foreign Direct Investment On The Ghanaian Energy Consumption

Abstract

The electricity consumption levels (demand) of the populace in Ghana (especially) have not been met most of the time. FDI is one resource which can be incessantly used to address this situation; so, it ought to be often treated as a pivotal determinant of electricity consumption. However, empirical studies conducted on the relationship between FDI and electricity consumption are generally scanty; they have also produced mixed results. Moreover, the direction of causality between these variables is irresolute. Therefore, using yearly data from 1980 to 2018, and employing the Nonlinear Autoregressive Distributed Lag (NARDL) estimation technique, this thesis endeavours to decompose FDI into its positive and negative shocks whose long-run and short-run effects need to be examined; to justify the overall role of FDI on electricity consumption in Ghana. In this vein, this thesis finds inspiration that; this contemporary technique actually aids in ascertaining any possible presence of asymmetry in the nexus which, when overlooked, renders biased model specification (especially when FDI in the power sector usually experiences cost sensitivities). Finally, this thesis conducts an inquiry into the exact form of causality prevailing between FDI and electricity consumption. It is found that the significant negative effect of the positive shock in FDI dominates (in terms of weight) the distinct effect of the negative shock in FDI when analyzing both long and short runs; and this led to the significant negative effect being found of general FDI on electricity consumption. In fact, as inconspicuous as the relative difference in magnitude of the above effects was, there was symmetry found for FDI effect on electricity consumption in both periods. Also, a unidirectional causality was found to move from FDI to electricity consumption. Generally, this thesis discovered the fulfilment of the Composite Effect Theory which illustrates the precise path to tread on. It is still recommended that more of FDI needs to be encouraged to reverse the abysmal electricity trends; and to industrialize Ghana more.