4.3 Data Sources, Measurement and Difficulties
4.4.6 Interpretation and Analysis ofResults
Based on the results obtained from the estimation of the ECM, I can make the following statistical inferences:
From Table 4.3, it can be observed that the R2 explains about 75.3 percent of the variations in the endogenous variable while other factors that were not included in the model explain the remaining 24.7 percent of variations in the endogenous variable. The probability of the F-statistic is significant at 5 percent implying that the model fit is good and the Durbin-Watson statistic of 2.003 indicate that the errors are not correlated. The estimated.results indicate foreign direct investment (FDI), gross fixed capital formation (GFCF) and openness of the economy (OPNS) as the significant variables both in the short-run and long-run. The remaining variables in the model
population (POP) are insignificant in the short-run and long-run. The equilibrium correction coefficient, LGDPPC (-1), has the required negative sign and is significant, bence the ECM model is valid. This therefore goes to suggest that there is a fairly high speed of adjustrnent to equilibrium after a shock. Approximately 69 percent of disequilibra from the previous year's shock converge back to the long-run equilibrium in the following year. From our model, a shock that occurs in the short-run is reabsorbed within a period of 1year and 5 months (this is obtained by dividing 1 by the error correction coefficient, -0.69).
FDI has a negative and significant impact on GDPPC both in the short-run and the long-run. The variable is statistically different from zero at 5 percent and 1 percent with a coefficient of -0.05 and -0.12 respectively. This means in the short-run, a 5 percent increase in FDI will cause a 0.25 percent decrease in economie growth, while in the long-run a 1 percent increase in FDI will cause growth to decrease by 0.12 percent. This negative relationship between FDI and growth is consistent with studies like Oteng-Abayie and Frimpong (2006). Borenzstein et al. (1998) in their study argued that FDI has a significant impact on growth in economies with a high level of human capital whiles the impact is negative in economies with low human capital stock.
This empirical fmding is not surprising in the sense that about 70 percent of FDI inflows to Ghana are into the mining sector. Meanwhile the mining sector's contribution to GDP is 3 percent while its' cost to GDP is 4 percent, implying that the mining sector's net contribution to economie growth is -1 percent. Since the mining sector does not generate direct growth impacts on the wider economy, it is crucial to attract export-oriented FDI into the agricultural and industrial sectors if FDI is to impact positively on growth. Secondly, Ghana as developing economy has a significantly low level ofhuman capital to absorb the technology that cornes with FDI.
Capital investment proxied by gross fixed capital formation has a positive sign and is statistically significant at 1 percent in the short-run with an elasticity of 0.25. This implies that a 1 percent increase in FDI willlead to a 0.25 percent increase in economie
~owth.
The long-run elasticity is 0.3 and is significant at 10 percent. This implies that a 10 percent increase in gross fixed capital formation will lead to a 3 percent increase in economie growth. This result of a positive relationship between gross fixed capital formation and growth is however consistent with otherstudies like Oteng-Abayie and Frimpong (2006). According to the neo-classical growth theory, an economy with a high capital stock tends to growth faster. This is because an increase in investment will lead to a higher capital per worker ratio leading to a higher productivity and hence a higher output level.
Openness of the economy has a negative sign and is statistically significant at 5 percent in the short-mn and the long-run. The coefficient of openness of the economy to growth is obtained as-0.47 in the short-run and -0.64 in the long-run. This therefore implies that a 5 percent increase in economie openness willlead to a 2.35 percent decrease in economie growth in the short-run and a 3.2 percent decrease in economie growth in the long-run. This result is however in contrast with that of Oteng-Abayie and Frimpong (2006) who found a positive impact of economie openness on economie growth in Ghana. However, other researchers such as Sash and Warner (1995) and Onafowora and Owoye (1998) found a negative relationship between openness and growth.
Though economie theory supports the fact that openness of the economy is one reason for developing economies to acquire technological transfer in order to boost economie growth, it is of outmost importance for sorne developing countries including Ghana to take a second and critical look at their libralisation policies. According to Chang et al. (2005), "output gains a:fter trade liberalisation depends on the degree of labour market flexibility. They argued that trade protection may ameliorate the problem of underdevelopment (or underproduction) in sectors affected by labour market distortions." According to international policy, for a country to engage in international trade she must have a comparative advantage to benefit from trade. Ghana can be said to have a comparative advantage in gold and cocoa production whose priees she does not determine. That is to say the terms of trade are also deteriorating and hence Ghana does not benefit much from international trade. As much as Ghana has benefited from being a member of ACP-EU and WTO it has also been a bane to Ghana's quest to attain economie development due to the influx of shoddy and below standard goods that has crippled a lot of businesses in ' Ghana.
From the Granger Causality test results, the null hypothesis that "GDPPC does not granger cause FDl" is rejected at the 95 percent confidence interval for lag 1 and 90 percent confidence interval for lag 2. There was no evidence of causality among the variables for lag 3. However, I fail to reject the null hypothesis that FDI does not granger cause GDPPC at the 5 percent significance lev el.
The granger causality results indicate that there is a unidirectional causality from GDPPC to FDI in the long-mn (table 4.4). The findings of this study are consistent with Sekmen (2007) who found a one-way causality from economie growth to foreign direct investment. However, there was no causality among the variables in the short-mn (table 4.5).
The fact the study failed to confirm FDI led growth in Ghana suggests that FDI is a necessary but not a sufficient condition to attain economie growth.
CHAPTER FIVE
EMPIRICAL FINDINGS, POLICY IMPLICATIONS AND CONCLUSION
This chapter focuses on the major findings from the study, policy implications and the conclusion. Recommendation is also made for areas where further research can be undertaken.
5.1 Empirical Findings of the Research
The objective of the research is to analyse the impact of foreign direct investment on economie growth in Ghana over the period 1970-2006. The empirical results suggest that FDI has a negative and significant impact on GDP per capita both in the short-run and the long-run; gross fixed capital formation ( domestic investment) has a positive and significant impact on GDP per capita in the short-run and the long-run; openness of the economy has a negative and significant impact on growth both in the short-run and the long-run.