The Effects of FDI on Ghana
Foreign direct investment (FDI) provides a major source of capital which brings with it up-to-date technology. It would be difficult to generate this capital through domestic savings, and even if it were not, it would still be difficult to import the necessary technology from abroad, since the transfer of technology to firms with no previous experience of using it is difficult, risky, and expensive.
Over a long period of time FDI creates many externalities in the form of benefits available to the whole economy which most companies cannot appropriate as part of their own income. These include transfers of general knowledge and of specific technologies in production and distribution, as well as industrial upgrading, work experience for the labor force and the introduction of modern management and accounting methods. The establishment of finance related and trading networks, and the upgrading of telecommunications services may also occur. FDI in services affects the host country’s competitiveness by raising the productivity of capital and enabling the host country to attract new capital on favorable terms.30 It also creates services that can be used as strategic inputs in the traditional export sector to expand the volume of trade and to upgrade production through product and process innovation.
Beyond the initial macroeconomic stimulus from the actual investment, FDI will influence growth by raising total factor productivity and, more generally, the efficiency of resource use in the recipient company or economy. This works through three channels: the linkages between FDI and foreign trade flows, the spillovers and other externalities in relation to the countryâ€™s business sector, and the direct impact on structural factors in the host economy. As countries develop and approach industrialized nation status, inward FDI contributes to their further integration into the global economy by engendering and boosting foreign trade flows. Apparently, several factors are at play. They include the development and strengthening of international networks of related enterprises and an increasing importance of foreign subsidiaries in MNEsâ€™ strategies for distribution, sales and marketing.
Overview of the Industrial Sector of Ghana
Ghanaâ€™s post-independence industrial development has evolved from an import substitution
industrialization (ISI) strategy to the current programme of private sector-led industrialization.
Prior to Ghanaâ€™s independence in 1957, the industrial sector, a corollary of the colonial
economic system, was small. Made up mainly of the domestic manufacturing sector, it
contributed very little to economic growth. The inherited industrial sector was underdeveloped
mainly because the colonial rulers had focused on the extraction of raw materials from the Gold
Coast (Ghana) while at the same time creating an economic system heavily dependent on
manufactured products from Britain.
When Ghana gained independence from Britain, the Nkrumah-led Convention Peopleâ€™s Party
(CPP) government considered industrialization to be a key factor in the modernization and
development of the country. The extensive programme which emphasized import substitution
aimed to transform the industrial structure and reduce dependence on colonial powers and other
foreign economies for goods. According to Killick (2010), the CPP government prioritized
import substitution because it was believed that it would eliminate the distortions of the earlier
system, provide an escape from the dependence on primary exports and break the vicious circle
of poverty. It was Nkrumahâ€™s belief that every imported item which could have been
manufactured locally, provided that conditions allowed it, added to Ghanaâ€™s continuing
economic dependence on the colonial system and delayed industrial growth (see Killick 2010:
The ISI strategy of the Nkrumah-led government sought to exploit Ghanaâ€™s natural domestic
resources to satisfy the basic needs of the population, create jobs, and assimilate and promote
technological progress. This, ultimately, would modernize the Ghanaian society as a whole. As
indicated by Baah-Nuakoh (1997), the general strategy adopted in the post-independence era was
the extensive promotion of industrialization with specific emphasis on manufacturing
development. This was to diversify the predominantly agricultural economy, create employment
for the rapidly growing population, raise per capita incomes, improve the balance of payments
and project the economy on the path of sustained and rapid economic growth.
At the centre of the ISI strategy was the development of large-scale, capital-intensive
manufacturing industries owned and managed by the state. Government invested heavily in
infrastructure and manufacturing activities by setting up state-owned enterprises (SOEs) for
domestic production of previously imported consumer goods, processing of exports of primary
products (agricultural and mining), and the expansion and development of building materials and
electrical, electronic and machinery industries. According to Steel (1972), the development of the
electrical, electronic and machinery industry was to provide the necessary inputs needed to
expand the industrial sector. As Steel notes (1972), it seemed that Nkrumahâ€™s industrialization
programme was entwined with socialism and macroeconomic policy within the framework of
Ghanaâ€™s broader development plan.
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