Effects of Exchange Rate Regimes on FDI Inflows in Ghana

Abstract

This paper investigated the effect of exchange rate regime on FDI inflows in Ghana. We modelled the causal relationship between FDI inflows and exchange rate regimes over a 39 year period (1970-2008). The paper employed the Ordinary Least Squares and the Cointegration technique to investigate the phenomenon. The variables were checked for stationarity after which a parsimonious Error-Correction model was estimated. Our findings indicated that exchange rate regime has no discernible effect on Ghana’s FDI. At best, the link is weak since it was only found to be significant at the 10% level. Democracy was found to have the expected positive sign and to be a robust determinant of FDI in Ghana. By implication, Ghana’s quest to attract FDI should go hand in hand with her efforts at sustaining the ongoing democracy. The contribution of this paper to the empirical literature lies in modelling exchange rate regimes and FDI inflows to Ghana. Previous studies on Ghana had concentrated on exchange rate misalignment and pass-through and their effect on FDI. Unravelling the empirical relationship between the FDI and exchange rate regime nexus on Ghana makes modest contribution to the empirical literature.