The presence of foreign firms in Ghana: The role of physical, financial, and governance infrastructure

• Attracting more foreign firms can potentially improve the growth of domestic firms, as well as increasing employment, revenues, and investment in Ghana.
• The volume and flow of foreign direct investment (FDI) into Ghana compare unfavourably with similar developing countries.
• The study explored the factors that determine the attractiveness of Ghana as a destination for foreign investment.
• Financial constraints are the most important impediment to attracting FDI.

The presence of foreign firms can contribute positively to development in Ghana. However, it remains less attractive as a destination for FDI than other comparable countries.

By looking at firm level data, we examined the barriers to FDI in the manufacturing and services sectors in Ghana. We looked at both subjective and objective measures of financial, physical and institutional constraints.

We found that the financial constraints are the most important barrier to foreign investment. The financial environment is key to attracting foreign invesment. The Bank of Ghana must therefore endeavour to maintain a stable rate of interest and inflation to aid business’s planning activities and investment decisions. Policy makers must improve accessibility to the financial environment particularly for small firms that are heavily constrained financially. Access to finance was a particular issue for firms that are under majority foreign ownership, as they are less able to tap into informal financial networks.

On objective measures, financial management is the biggest barrier, along with lack of access to the judiciary and electricity outages. Financial management, represented by external auditing, is a significant deterrent to foreign investment. Therefore, government should provide financial education to support firms to improve the management of their financial practices.

In the case of physical constraints, the results call for policy makers to provide sustainable sources of energy to guarantee continuity of production and sales. Government should explore alternative sources to ensure the availability of power supply which affects all firms, irrespective of the industry choice. At the regional level, energy is found to be a binding constraint for the Northern part of Ghana.

With regards to institutional constraints, government must target policy at large firms and the services industry, where rampant corruption significantly deters foreign firms from investing in Ghana.