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The impact of foreign direct investment on the growth of the manufacturing sector: exploring the role of institutional quality in Ghana

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Abstract

This paper uses time series data covering the period from 1980 to 2019 to study the role of institutional quality in influencing the impact of foreign direct investment (FDI) on manufacturing sector growth and explore the impact of FDI on manufacturing sector growth in Ghana. We used the bound test approach to cointegration within the autoregressive lags model (ARDL) framework as an estimation strategy. The results of the ARDL indicate that FDI influences manufacturing sector growth negatively. At the same time, the interaction of FDI with institutional quality exerts a positive and significant effect on manufacturing sector growth. These results show that the quality of institutions is needed to complement the inflow of FDI to boost the growth of the manufacturing sector. Hence, policy interventions aimed at improving the manufacturing sector should target improving the quality of institutions through minimizing corruption among state and private institutions.

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Fig. 1

Source: Author’s computation based on data from world development Indicators

Fig. 2

Source: Author’s computation based on data from world Governance Indicators

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Data availability statement

Data associated with this study can be accessed at the links below. World development indicators: http://datatopics.worldbank.org/world-development-indicators/. Washington DC: World Bank. World Governance indicator: https://info.worldbank.org/governance/wgi/

Notes

  1. Proposed by Kwiatkowski et al. (1992), Dickey and Fuller (1979) and Philip and Perron (1988).

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Acknowledgements

We would like to express our profound gratitude to the editors and the anonymous reviewers for their insightful comments, which considerably uplifted the quality of this manuscript. We thank them for their time and effort.

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Authors did not receive any direct funding for this study.

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Authors and Affiliations

  1. School of Economics, Finance, and Marketing, RMIT University Melbourne, Melbourne, Australia

    Opoku Adabor

  2. Kwame Nkrumah University of Science and Technology, Kumasi, Ghana

    Eric Fosu Oteng-Abayie & Emmanuel Buabeng

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  1. Opoku Adabor
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  2. Eric Fosu Oteng-Abayie
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  3. Emmanuel Buabeng
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Contributions

OA: conceptualization, methodology, data curation, formal analysis, resources, writing—original draft and editing. EFO-A: methodology, formal analysis, writing—original draft, writing—review and editing. EB: conceptualization, writing—review, writing—original draft and editing.

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Correspondence to Opoku Adabor.

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Adabor, O., Oteng-Abayie, E.F. & Buabeng, E. The impact of foreign direct investment on the growth of the manufacturing sector: exploring the role of institutional quality in Ghana. SN Bus Econ 3, 2 (2023). https://doi.org/10.1007/s43546-022-00369-1

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