Institutional quality and foreign direct investment in Ghana: A bounds-testing cointegration approach

Abstract

Purpose

This paper aims to investigate the impact of institutional quality on foreign direct investment (FDI) in Ghana for the period 1985-2016.

Design/methodology/approach

The study uses the autoregressive distributed lag (ARDL) approach to examine the relationship between institutional quality along with other controlled variables and FDI.

Findings

Evidence from the ARDL framework establishes a positive significant effect of institutional quality on FDI irrespective of the time horizon. The results also reveal a significant impact of inflation on FDI in both short and long run, while GDP per capita growth and trade are significant determinants only in the short run.

Practical implications

The study recommends the instigation of effective policies and strategies that seek to strengthen the quality of institutions, as this provides a conducive investment climate to attract FDI. Specifically, policies that are focused on promoting transparent legal regimes, regulatory reforms, non-corrupt institutions and political stability should be the precedence of policymakers.

Originality/value

In addition to being a pioneering work on the impact of institutional quality on FDI in Ghana, the main contribution of the study lies in its application of the principal component analysis to generate a single measure of institutional quality based on a number of institutional factors.

Citation

Yakubu, I.N. (2020), "Institutional quality and foreign direct investment in Ghana: A bounds-testing cointegration approach", Review of International Business and Strategy, Vol. 30 No. 1, pp. 109-122. https://doi.org/10.1108/RIBS-08-2019-0107