Value for Money: Evaluating the Competitiveness and Effectiveness of Ghana's FDI Promotion Policies

Abstract

Ghanaian policymakers seeking to formulate policies to position the country to receive FDI are faced with an ever-­‐expanding number of empirical studies, anecdotes from other developing nations, and policy initiatives from other nations traditionally seen as competitors for FDI. While a lot has been written about the impact various discrete factors can have on FDI and about the efficacy of specific policies initiatives, this thesis provides the first known evaluation of Ghana’s current investment needs and the efficacy of its investment promotion policies as tools to fulfill those needs. The thesis also lays out an empirically grounded approach that Ghanaian policymakers should adopt as they reformulate their FDI promotion policies. Due to structural issues in Ghana’s banking industry and the existence of more pressing priorities for government spending, there is a compelling case to be made that Ghana should be looking to FDI as a means of achieving its private sector growth targets. The banking industry does not offer the competitive financing needed for indigenously financed massive private sector expansion. While the government cannot provide the funding needed to bridge the gap left by the banking industry without exposing itself to exorbitant borrowing costs and/or ignoring pressing first-­‐order priorities that could contribute to economic growth if addressed. Consequently, FDI offers the kind of investment Ghana needs to achieve its private sector growth goals. Because Ghana can benefit from FDI inflows, this thesis focuses on how the government can effectively attract such investment. To this end, the thesis first evaluates the steps Ghana is currently taking to attract foreign investment. Empirical analyses reviewed and conducted in this thesis both find that improving business related institutions is an effective way for the Ghanaian government to attract foreign investment while helping to support the operations of domestic firms. However, the effectiveness of Ghana’s direct incentive policies is less conclusive. Ghana does not fulfill the conditions the literature has found essential in order for direct incentive policies to have a positive impact. Instead, Ghana’s direct incentives policies are employed at great cost to both the government and the conventionally taxed private sector without a clear understanding of their benefits. The thesis lays out a cost-­‐effective approach for Ghanaian policymakers trying to attract foreign investment. Rather trying to entice foreign investors with direct incentives, the thesis demonstrates how the government could identify and address constraints on business activities in the country, an action which would both ameliorate the difficult circumstances faced by domestic firms and increase Ghana’s attractiveness as an investment location. An implication of this thesis is the importance of a two-­‐pronged mandate for the Ghanaian government when formulating FDI promotion policies: First, the government should ensure that domestic firms are well positioned to benefit from FDI. Second, the government should seek to secure as much FDI as possible. This thesis shows that by working towards fulfilling the first prong, the government can actually position itself to achieve fulfill the second.