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

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  • Adenutsi, Deodat E.

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.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 37116.

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Date of creation: 10 May 2007
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Publication status: Published in Journal of Business Research 1&2.2(2008): pp. 71-89
Handle: RePEc:pra:mprapa:37116

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Related research

Keywords: Globalization; Trade Openness; Foreign Direct Investment; Industrial Performance;

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References

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  1. Sindzingre, Alice, 2005. "Explaining Threshold Effects of Globalization on Poverty: An Institutional Perspective," Working Paper Series RP2005/53, World Institute for Development Economic Research (UNU-WIDER).
  2. BARRIOS, Salvador & GOERG, Holger & STROBL, Eric, 2004. "Foreign direct investment, competition and industrial development in the host country," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2004011, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Akinkugbe, Oluyele, 2003. "Flow of Foreign Direct Investment to Hitherto Neglected Developing Countries," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  4. Ricardo, David, 1821. "On the Principles of Political Economy and Taxation," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, McMaster University Archive for the History of Economic Thought, edition 3, number ricardo1821.
  5. G. D. A. MacDougall, 1960. "THE BENEFITS and COSTS OF PRIVATE INVESTMENT FROM ABROAD: A THEORETICAL APPROACH," The Economic Record, The Economic Society of Australia, vol. 36(73), pages 13-35, 03.
  6. Dean, J.M. & Desai, S. & Riedel, J., 1994. "Trade Policy Reform in Developing Countries since 1985," World Bank - Discussion Papers, World Bank 267, World Bank.
  7. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  8. Jamuna Agarwal, 1980. "Determinants of foreign direct investment: A survey," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 116(4), pages 739-773, December.
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Cited by:
  1. Samuel Antwi & Ebenezer Fiifi Emire Atta Mills & Xicang Zhao, 2013. "Impact of Macroeconomic Factors on Economic Growth in Ghana: A Cointegration Analysis," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 3(1), pages 35-45, January.

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