The impact of exchange rate volatility on foreign direct investment inflows in Ghana.

Abstract

This paper analyzed the effect of exchange rate volatility and its interaction on the foreign direct investment inflow into Ghana. The unit root of the series was checked using Augmented Dickey-Fuller (ADF), Phillps-Parron (PP) and Kwaiatkpwski-Phillps-Schmidt-Shin (KPSS) tests. According to the results of the unit root tests all the variables were stationary at 5 percent level of significance in their first difference. Therefore, the Dynamic Ordinary Least Square regression model was used for the analysis. It was found that the depreciation of the real exchange rate, the degree of openness of the economy and interaction term do not encourage the inflows of foreign direct investment. However, size of economy and volatility do attract foreign direct investment inflows. Based on the above findings the following recommendations are made. Since volatility of the real exchange rate attracts FDI inflows, the Government should encourage import substitute FDIs to help Ghana industrialized.