The Impact of Macroeconomic Variables, Investment Incentives and Government Agreements on FDI Inflows in Ghana

Abstract

The last two decades have witnessed an extensive growth and an ever-increasing competition in foreign direct investment (FDI) flows to the developing countries. This has resulted in higher investment incentives offered by the host governments and an increase in the number of bilateral investment treaties (BITs) and regional agreements on investments. This research addresses the effectiveness of selective government policies and investment agreements in attracting FDI flows in developing countries. To achieve this, the impact of economic variables such as presence of infrastructure, cost of labor, annual gross domestic product (GDP) growth, real effective exchange rate, and tax incentives as well as bilateral investment treaties on the inflows of foreign direct investment within a 30-year span in Ghana was examined. The paper employed a regression analysis with the dependent and independent variables being FDI inflows and the listed variables respectively. Additionally, analytical techniques such as heteroskedasticity and Chou test were conducted. From the study, it is observed that inflows of FDI vary within the structural break analyzed and a low percentage of BITs reflect as a contributing factor of FDI. However, national policies proved to play a significant role in attracting FDI into Ghana.