Foreign Direct Investment and Productivity Growth of Ghanaian Manufacturing Firms
AbstractThis paper examines foreign direct investment (FDI) effect on the productivity of local manufacturing firms in Ghana. By using a firm level panel data of eight subsectors in the Ghanaian manufacturing industry covering the period, 1992 - 2003, the paper examines labour productivity of local firms by following the methodology of Kohpaiboon (2005) which begins with the Cobb Douglas production function. Appropriate diagnostics are carried out for the adoption of the models for the empirical estimation. The regression results revealed a significant FDI effect on local manufacturing firms’ productivity. It was found that there is a direct link between FDI and productivity of local manufacturing firms in Ghana. All the key variables of the productivity model, i.e. FDI, capital stock, technological spillover and quality of labour had positive effect on local manufacturing firms’ productivity. This means that with more FDI inflows, local firms are able to have the needed funds to invest in technology to improve upon productivity, more funds to invest in labour for them to acquire the needed skills to improve upon productivity and more funds to increase their capital to improve upon productivity. All the control variables included in the regression models, i.e. firm age and firm size, proved to have significant effects on local manufacturing firms’ productivity. This means that larger firms in the Ghanaian manufacturing industry are likely to perform better than smaller firms. Firms which have been in existence for long (older firms) also have the potential of performing better than firms which have not be in existence for long (newer firms). This is because firms gain experience as they stay for long in the manufacturing industry. They are able to learn from their mistakes and perform well. The findings of this study have relevant implications for government economic policy.
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