ISSN: 2056-3736 (Online Version) | 2056-3728 (Print Version)

Τhe effect of foreign direct investment on economic growth in Ghana: the role of exchange rate volatility

Samuel Antwi, Prince Yeboah Boateng and Awudu Salley

Correspondence: Samuel Antwi,

Department of Accounting, University of Professional Studies, Ghana

pdf (675.34 Kb) | doi:


The main objective of the study is to examine the effect of foreign direct investment inflows on economic growth in Ghana: the moderating role of exchange rate volatility. The study used Auto-Regressive Distributed Lags (ARDL) and Generalized Autoregressive Conditional Heteroskedasticity (GARCH). The study was based mainly on secondary data from World Development Indicators (WDI) where annual time-series data of 39 years was used for the study ranging from 1980 to 2018. The study found that FDI had a positively significant impact on growth in the short run. Also, exchange rate volatility had a negatively significant impact on economic growth in the long run. However, domestic capital and trade openness had a positive significant impact on economic growth in the long run. The long-run estimate suggests that FDI decrease growth and exchange rate volatility dampen the negative effect of FDI on growth. The study, therefore, recommended, among other things, that the government should formulate policies that attract foreign direct investors into the country, as this may stabilize the economy.


  FDI, Economic growth, Exchange rate volatility, Ghana


Acheampong, I.K. (2007). Testing Mckinnon-Shaw Thesis in the Context of Ghana’s Financial Sector Liberalisation Episode. International Journal of Management Research and Technology, 1 (2), 156-183.

Adams, S. & Opoku, E.E.O. (2015). Foreign Direct Investment, Regulations and Growth in sub-Saharan Africa. Economic Analysis and Policy, 47, 48-56.

Adenutsi, D.E. (2008). Effect of Trade Openness and Foreign Direct Investment on Industry Performance in Ghana. Journal of Business Research (JBR), 2, 1-2.

Agri, E.M., Felix, N.D., Iyaji, E.A. Rosemary, A. & Vonke, D. (2018). Effect of Exchange Rate Policy and its Volatility on Economic Growth in Nigeria. International Journal of Advanced Studies in Economics and Public Sector Management, 6 (2), 166-190.

Alagidede, P., & Ibrahim, M. (2017). On the Causes and Effects of Exchange Rate Volatility on Economic Growth: Evidence from Ghana. Journal of African Business, 18(2), 169–193.

Alagidede, P., Baah-Boateng, W., & Nketiah-Amponsah, E. (2013). The Ghanaian Economy: An Overview. Ghanaian Journal of Economics, 1(1), 4-34.

Ali, W. & Abdullah, A. (2015). The Impact of Trade Openness on the Economic Growth of Pakistan: 1980-2010. Global Business and Management Research: An International Journal, 7 (2), 120-129.

Aliyu, S. U. R. (2010). Exchange rate volatility and export trade in Nigeria: An empirical investigation. Applied Financial Economics, 20(13), 1071–1084.

Antwi S., Mills. E. F. E. A., Mills G. A., Zhao X. (2013). Impact of Foreign Direct Investment on Economic Growth: Empirical Evidence from Ghana. International Journal of Academic Research in Accounting, Finance and Management Sciences, 3 (1), 18–25.

Antwi, S., & Koranteng, E. O. (2017). International Remittances and Economic Growth in Ghana; Does the Measure of Financial Development Matter? International Journal of Technology and Management, 2(1), 46-59.

Appiah-Konadu, P., Shitsi, F. J., Abokyi, E., & Twerefou, D. K. (2016). The Effect of Foreign Aid on Economic Growth in Ghana. African Journal of Economic Review, 5(2), 248-261.

Asheghian, P. (2004). Determinants of Economic Growth in the United States: The Role of Foreign Direct Investment. The International Trade Journal, 18 (1), 63-83.

Asiedu, M.K. (2013). Trade Liberalization and Growth: The Ghanaian Experience. Journal of Economics and Sustainable Development, 4 (5), 125-135.

Bahmani-Oskooee, M. and Hajilee, M. (2013). Exchange Rate Volatility and its Impact on Domestic Investment. Research in Economics, 67, 1-12.

Balasubramanyam, V.N., Salisu, M. & Sapsford, D, (1996). Foreign Direct Investment and Growth in EP and IS countries. The Economic Journal, 106, 92-105.

Banerjee, A., Dolado, J. & Mestre, R. (1998). Error-Correction Mechanism Tests for Cointegration in a Single-Equation Framework. Journal of Time Series Analysis, 19 (3), 267-283.

Bollerslev, T. (1986). Generalised Autoregressive Conditional Heteroscedasticity. Journal of Econometrics, 31 (3), 307–327. doi: 10.1016/0304-4076(86)90063-1

Brook, C. (2014). Modeling long-run relationships in finance. In Introductory Econometrics for Finance (2nd Edition ed., pp. 318-365). New York: Cambridge University Press.

Colombage, S. R., & Halabi, A. K. (2012). Asymmetry of information and the finance-growth nexus in emerging markets: empirical evidence using panel VECM analysis. The Journal of Developing Areas, 46(1).

Dal Bianco, S., & Loan, N. (2017). FDI Inflows, Price, and Exchange Rate Volatility: New Empirical Evidence from Latin America. International Journal of Financial Studies, 5(6), 1-17.

Dickey, D. A. and Fuller, W. A. (1979). Distribution of the Estimators for Autoregressive Time Series with a Unit-root. Journal of the American Statistical Association, 74: 427-431.

Edwards, S. (1993). Openness, Trade Liberalization and Growth in Developing Countries. Journal of Economics Literature, 31 (2), 1358-1393.

Engel, C. & Rose, A. (2000). Currency Unions and International Integration. Journal of Money, Credit and Banking, 136, 381-400.

Evans, Y., Kesse, C., Gladys, A. & Nyamoto, K.K. (2018). Foreign Direct Investment Inflows in Ghana: Is There Any Political and Priority Influence in the Distribution among the Sectors and Regions of the Ghanaian Economy? Open Journal of Business and Management, 6, 973-989.

Falki, N. (2009). Impact of Foreign Direct Investment on Economic Growth in Pakistan. International Review of Business Research Papers, 5 (5), 110–120.

Fambon, S. (2013). Foreign capital inflow and economic growth in Cameroon. World Institute for Development Economics Research, 1-22.

Frankel, J. and Rose, A. (2002). An Estimate of the Effect of Common Currencies on Trade and Income. Quarterly Journal of Economics, 117(2), 437-466.

Frimpong, J. M., & Oteng-Abayie, E. F. (2006). Bivariate Causality Analysis between FDI Inflows and Economic Growth in Ghana. Retrieved from

Gertler and K. Rogoff (ed.), NBER Macroeconomics Annual. NBER Working Paper No. 9072.

Githanga, B.W. (2015). Trade Liberalization and Economic Growth in Kenya: An Empirical Investigation (1975-2013). Master Thesis, Department of Economics, Södertörns högskola.

Hamad, M. M., Mtengwa, B. A., & Babiker, S. A. (2014). The Impact of Trade Liberalization on Economic Growth in Tanzania. International Journal of Academic Research in Business and Social Sciences, 4 (5), 514.

Johansen, S., & Juselius, K. (1990). Maximum Likelihood Estimation and Inference on Cointegration with Application to the Demand for Money. Oxford Bulletin of Economics and Statistics, 52 (2), 169–210.

Khan, M. A., & Qayyum, A. (2007). Trade, Financial and Growth Nexus in Pakistan. Economic Analysis Working Papers.

Kiliçarslan, Z. (2018). The Relationship between Exchange Rate Volatility and Foreign Direct Investment in Turkey: Toda and Yamamoto Causality Analysis. International Journal of Economics and Financial Issues, 8(4), 61–67.

Kremers, J. J., Ericsson, N. R., & Dolado, J. J. (1992). The Power of Cointegration Tests. Oxford Bulletin of Economics and Statistics, 54 (3), 325–348.

Kucera, D. (2002). Core Labour Standards and Foreign Direct Investment. International Labour Review, 141 (1/2), 31-69.

Kyereboah-Coleman, A. and Agyire-Tettey, K.F. (2008) Effect of Exchange-Rate Volatility on Foreign Direct Investment in Sub-Saharan Africa: The Case of Ghana. The Journal of Risk Finance, 9 (1), 52-70

Mmieh, F. & Owusu-Frimpong, N. (2004). State policies and the challenges in attracting foreign direct investment: a review of the Ghana experience. Thunderbird International Business Review, 46 (5), 575–599.

Mwinlaaru, P.Y. & Ofori, I.K. (2017). Real Exchange Rate and Economic Growth in Ghana. MPRA Paper No. 82405.

Narayan, P. K. (2005). The Saving and Investment Nexus for China: Evidence from Cointegration Tests. Applied Economics, 37, 1979–1990.

Narayan, P.K. & Narayan, S. (2006). Savings Behaviour in Fiji: An Empirical Assessment using the ARDL Approach to Cointegration. International Journal of Social Economics, 33, 468-480.

Nduka, E.K., Chukwu, J.O. Kalu, I. K & Nwakaire, O.N. (2013). Trade Openness and Economic Growth: A Comparative Analysis of the Pre and Post Structural Adjustment Programme (Sap) Periods in Nigeria. Asian Journal of Business and Economics, 3 (3), 1-12.

Nketsiah, I. & Quaidoo, M. (2017). The Effect of Foreign Direct Investment on Economic Growth in Ghana. Journal of Business and Economic Development, 2 (4), 227-232.

Nyarko, P. A., Nketiah-Amponsah, E., & Barnor, C. (2011). Effects of Exchange Rate Regimes on FDI Inflows in Ghana. International Journal of Economics and Finance, 3 (3), 277–286.

Obeng, C. K. (2014). Effect of corporate tax on sector-specific foreign direct investment in Ghana. Munich Personal RePEc Archive, 58454.

Pesaran, M. H., Shin, Y. & Smith, R. J. (2001). Bounds Testing Approaches to the Analysis of Level Relationships. Journal of Applied Econometrics, 16, 289-326.

Pesaran, M. H., Shin, Y., & Smith, R. P. (1999). Pooled Mean Group Estimation of Dynamic Heterogeneous Panels. Journal of the American Statistical Association, 94 (446), 621–634.

Phillips, P. C. B. & Perron, P. (1988). Testing for a Unit Root in Time Series Regression. Biometrika,75 (2), 335-346.

Raj, T. & Pahwa, A. (2018). Impact of Foreign Investments on Economic Growth of India. Research Review International Journal of Multidisciplinary, 3 (12), 53-57.

Sachs, J.D. and Warner, A. (1995). Economic Reform and the Process of Global Integration. Brookings Papers on Economic Activity, 26, 1-118.

Schneider, F. & Frey, B. S. (1985). Economic and Political Determinants of Foreign Direct Investment. World Development, 13, 161–175.

Sethi, N. (2013). Causal Relationship between Foreign Capital Inflows and Economic Growth: Empirical Evidence from India. International Journal of Economics, Finance, and Management, 2(1), 65-69.

Shaheen, S., Ali, M. M., Kauser, A., & Bashir, F. (2013). Impact of Trade Liberalization on Economic Growth in Pakistan. Interdisciplinary Journal of Contemporary Research in Business, 5 (5).

Sokang, K. (2018). The Impact of Foreign Direct Investment on Economic Growth in Cambodia: Empirical Evidence. International Journal of Innovation and Economic Development, 4 (5), 31–38.

Solow, R.M. (1957). Technical Chane and the Aggregate Production Function. The Review of Economics and Statistics, 39 (3), 311-320.

Tenreyro, S. (2007). On the Trade Impact of Nominal Exchange Rate Volatility. Journal of Development Economics, 82 (2), 485–508.

Tuffour, J. K. (2013). Foreign Aid, Domestic Revenue, and Economic Growth in Ghana. Journal of Economics and Sustainable Development, 25-33.

Tweneboah, G., & Alagidede, P. (2015). Dollarization in Ghana: Measurements, determinants and policy implications (Working Paper No. 315). African Finance and Economics Consult.

Ullah, S., Haider, S. Z., & Azim, P. (2012). Impact Of Exchange Rate Volatility On Foreign Direct Investment: A Case Study of Pakistan. Pakistan Economic and Social Review, 50 (2), 121-138.

Vu, T.B., Gangnes, B., and Noy, I. (2006). Is Foreign Investment Good for Growth? Answers Using Sectoral Data from China and Vietnam. Unpublished.

Wijeweera, A., Villano, R., & Dollery, B. (2010). Economic Growth and FDI Inflows: A Stochastic Frontier Analysis. The Journal of Developing Areas, 43 (2), 143-158.

World Bank (2019). World Development Indicators. Retrieved from The World Bank: www.

World Bank. (2013). World Development Indicators. Washington D.C: World Bank.