Short run causal relationship between foreign direct investment (FDI) and infrastructure development

Abstract

Purpose Foreign direct investment (FDI) flows for infrastructure development have grown in volume to become more widely dispersed among home (outward investor) and host (recipient) countries. This paper aims to explore the short-run causal relationship between FDI and infrastructure development in the developing country of Ghana. Design/methodology/approach A two-stage least squares estimation method was adopted where FDI was endogenized, and all variables were in constant prices. Stationarity tests were performed on the annualized log difference of variables using augmented Dickey–Fuller test (ADF). Findings Results reveal a positive and significant relationship between FDI and infrastructure but a negative and significant relationship between FDI and GDP and FDI and openness. GDP growth also has a long-run negative relationship with FDI inflows. Originality/value The paper’s contribution to knowledge is two-fold. First, it examines the short run effect of FDI upon the Ghanaian economy and how market shocks to FDI and infrastructure development can be ameliorated. Second, it illustrates that government policymakers should prioritize development that requires FDI and ensure that the local market is not excessively open to foreign exploitation. Future work is required to further investigate international capital flow and its impact upon other developing nations.