According to this view, foreign direct investment may boost the productivity of all firms (i.e. including those not receiving the capital). Thus transfers of technology through foreign direct investment may have substantial spillover effects for the entire economy which in turn leads to economic growth.
In contrast, some theories predict that foreign direct investment in the presence of preexisting trade, price, financial and other distortions will hurt resource allocation and slow growth in an economy (Boyd and Smith 1992). This therefore suggests that, theory produces ambiguous predictions about the growth effects of foreign direct investment. It is for this reason that foreign direct investment is included in the model as an explanatory variable so as to ascertain the growth impact of foreign direct investment. Foreign direct investment is included in the model so as to ascertain it growth impact in Ghana. The expectation sign for FDI is assumed to be positive (+) in that it is expected to lead to increase in economic growth.
Other Factors: The other factors not included in the model and errors are captured by the error term denoted by letter U.
Descriptive Statistics of the variables The summary of statistics is presented in Table 4.1. The various macroeconomic variables used for the analysis are economic growth, exchange rate, FDI as a percentage of GDP, inflation rate, inflow of FDI, import, export and GDP. The mean of the observed economic growth rate from 1970 to 2010 is 3.37%. There is 95% confidence that the mean of economic growth rate over the 41-year period falls between 1.82% and 4.93%. The mean exchange rate is 1,818.13 which is 95% confident that it falls between 1.82% and 4.93%. 43
FDI and economic growth in ghana