Effects of trade openness and foreign direct investment on industrial performance in Ghana

Deodat Adenutsi

MPRA Paper from University Library of Munich, Germany

Abstract: This paper analyzes the macroeconomic implications of trade openness and foreign direct investment (FDI) on industrial performance in Ghana. The paper argues that in Ghana industrial performance is affected adversely by trade openness through a number of mechanisms including monetary policy, fiscal policy, and FDI. The methodological approach consists of analyzing a set of macroeconometric models using quarterly data for the period 1983(1)-2006(4) under general-to-specific parsimonious conditions. Unrestricted Cointegrating and Vector Error-Correction Models were estimated to examine the static and dynamic long-run effects as well as the short-run dynamics of the system and the speed of adjustment to the long-run equilibrium. The findings indicate that industrial performance is largely impeded by trade openness, high lending rate of commercial banks and, to a lesser extent, corporate tax. The main positive determinants of industrial performance are raw material availability, previous level of economic performance, industrial wage, and a moderate rate of inflation. It is, therefore, recommended that effective policies should be directed at stabilizing the macroeconomy to reduce the operational risks of banks which would reflect in lower lending rates, making the agricultural sector more vibrant for increased supply of raw materials to the industrial sector, and paying attractive industrial wages to workers. It is also recommended that policymakers should formulate and implement prudent policies that would appropriately harness domestic capital to finance industrial activities rather than over-relying on FDI (that does not have significant long-run impact on industrial performance in Ghana.

Keywords: Globalization; Trade Openness; Foreign Direct Investment; Industrial Performance (search for similar items in EconPapers)
JEL-codes: C22 F14 F4 L6 (search for similar items in EconPapers)
Date: 2007-05-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published in Journal of Business Research 1&2.2(2008): pp. 71-89

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