Foreign direct investment, structural transformation and employment: evidence from Ghana

In spite of a fast growth, many African countries still largely rely on low productivity agriculture. Foreign direct investments (FDI) could enable structural change by creating new employment opportunities in higher value-added sectors, leading the transition of mostly rural economies to manufacturing- and service-based systems. However, FDI could also accelerate the “premature de-industrialization” of these economies, i.e., their transition to a service-based economy in absence of a well developed manufacturing sector. Looking at the interesting case of Ghana, in this paper we study how FDI drive shifts in the employment shares of the industries in which they operate. To this end, we match data on greenfield FDI with individual-level information on workers employed in different industries. Our results show that FDI increase the share of workers employed in services across all service industries, but especially in retail trade. The effect is more pronounced for educated workers, particularly women, pointing at education as a key factor to match the labour demand of foreign firms. Instead, we do not find that FDI increases the size of the manufacturing sector, where there are even indications of a displacement effect. Overall, FDI may have contributed to the premature deindustrialization of Ghana.