Assessing the Impact of FDI and Its Nexus on Domestic Investment in Ghana

Abstract

Aims: To examine the effect of Foreign Direct Investment (FDI) on domestic investment in Ghana Study Design:  Both Quantitative and Qualitative Study. Place and Duration of Study: The Department of Mathematical Sciences at University of Mines and Technology, Ghana, between January 2024 and August 2025. Methodology: The study employs annual secondary time-series data (1990–2019) drawn from the World Development Indicators. Using the Agosin–Machado investment model augmented with inflation, GDP growth and the nominal exchange rate, it applies the ARDL bounds-testing approach to cointegration and an Error-Correction Model for short-run dynamics. ADF and Phillips–Perron tests verify that variables are I(0) or I(1), while standard post-estimation diagnostics check for serial correlation, heteroscedasticity, normality and parameter stability. Direction of causality between foreign and domestic investment is examined with pairwise Granger tests after selecting optimal lag lengths via VAR criteria. Results: ARDL bounds tests confirm a long-run equilibrium among the variables; the long-run estimate shows FDI has a significant negative (crowding-out) effect on domestic investment, while inflation exhibits an inverted-U impact, GDP growth is positively associated and the exchange rate is negatively related. Short-run ECM results mirror these signs and reveal a 45 % annual speed of adjustment back to equilibrium. Diagnostic and stability tests (Breusch-Godfrey, Jarque-Bera, CUSUM, CUSUMSQ) indicate a well-specified, stable model with no serial correlation or heteroscedasticity. Finally, Granger causality tests find no significant directional causality between foreign and domestic investment in Ghana. Conclusion: The study concludes that FDI crowds out domestic investment in Ghana, while moderate inflation and GDP growth support it and exchange-rate depreciation harms it; no causal link exists between FDI and domestic investment. Policy should therefore target FDI diversification, strengthen local absorptive capacity, and improve the business climate to protect and stimulate domestic investors.