Institutional quality and foreign direct investment in Ghana

Purpose: This paper aims to investigate the impact of institutional quality on foreign direct investment (FDI) in Ghana for the period 1985-2016. Design/methodology/approach: The study uses the autoregressive distributed lag (ARDL) approach to examine the relationship between institutional quality along with other controlled variables and FDI. Findings: Evidence from the ARDL framework establishes a positive significant effect of institutional quality on FDI irrespective of the time horizon. The results also reveal a significant impact of inflation on FDI in both short and long run, while GDP per capita growth and trade are significant determinants only in the short run. Practical implications: The study recommends the instigation of effective policies and strategies that seek to strengthen the quality of institutions, as this provides a conducive investment climate to attract FDI. Specifically, policies that are focused on promoting transparent legal regimes, regulatory reforms, non-corrupt institutions and political stability should be the precedence of policymakers. Originality/value: In addition to being a pioneering work on the impact of institutional quality on FDI in Ghana, the main contribution of the study lies in its application of the principal component analysis to generate a single measure of institutional quality based on a number of institutional factors.