Foreign Direct Investments In Ghana: Growth & Anti-Growth Sentiments

INTRODUCTION
The advent of globalization and information technology has significantly improved international finance and capital markets. Capital flows from the North to South have heightened, as international trade and production gained prominence in the world. These events led to the promulgation of international capital movement to developing nations in Asia, South America and Africa; although others have argued that the growth in FDI was also a consequence of the steady decline in official development assistance (ODA), especially to Africa.

The international flow of financial resources into developing economies, takes three main forms; foreign direct investment and foreign portfolio investment; remittances of earnings by international migrants; and foreign Aid. In the first form, foreign direct investment (FDI) has a long-term nature (compared to portfolio investments) and it has been, in most cases, carried through Multinational Corporations (MNC) or transnational corporations (TC). An MNC, in simple terms, is a corporation or enterprise that conducts and controls productive activities in more than one country. MNCs have two essential features; large size and parent companies (in home countries) control of operations and activities. FDI through the MNCs could be in different forms; Greenfield investments, where a new subsidiary is established; acquisition, where an existing company is bought; and other forms including joint venture, vertical or horizontal FDI. MNCs have different motives for undertaking international production; seeking resources; gaining market share; achieving efficiency; and controlling strategic assets.

According to the World Investment Report 2018, Global Foreign Direct Investment (FDI) flows fell by 23 per cent to $1.43 trillion. FDI flows to developing economies remained stable at $671 billion, seeing no recovery following a 10 per cent drop in 2016. Asia was the largest recipient of FDI, with a value of $476 billion, whilst Africa’s share of FDI continued to decline to $42 billion. This decline was concentrated in the commodity-exporting economies such as Egypt, Mozambique, Congo, Nigeria and Angola. In 2017, Ghana attracted $3.3 billion in FDI flows (down 7 per cent), representing about 7.8 percent of total inflows to Africa. This was achieved on the back of fiscal consolidation and self-imposed reductions in Government investment spending. Ghana’s diversified economy had facilitated a continuous increase in its FDI flows since the 2000s.

FDI IN GHANA
Over the past 30 years, Ghana has made efforts to attract FDI into its main sectors of the economy; agriculture, manufacturing (Industrial) and services. This began from the implementation of the Structural Adjustment programme (SAP) and the Economic Recovery programmes (ERP) from the 1980s and 1990s, and also the creation of the Mineral and Mining Law (1986), Ghana Investment Promotion Center (GIPC) Act (1994), the Free Zones Act (in 1995) and the privatization program (in the early 90s) which led to the privatization of about 300 state-owned enterprises. As a result, FDI rose from about $20 million in 1990 to around $200 million at the end 1999. Since then it has risen to about $3.3 billion in 2017.

The encouragement of foreign investment in Ghana is seen as an integral part of Ghana's economic policy. The Ghana Investment Advisory Council (GIAC) was also established to help shape government policy; it aimed at creating an enabling investment environment. After 1992, at the inception of multi-party democracy, all governments have placed emphasis on the role of FDI in national development, and these have been captured in their various policy documents and political manifestoes. The current government is looking forward to a number of FDI inflows to complement its industrialization program, dubbed ‘1 district 1 factory’.

Ghana does not have reliable data on FDI movements since 1980s, but researchers have observed some trends. Majority of foreign investments are concentrated in mining, oil exploration, telecommunication and manufacturing. Other minor recipient sectors also include; Services, Tourism, Building and Construction, Export Trade, Agriculture and General Trade. On regional basis, FDI flows have continued to be highly concentrated in Greater Accra Region. According to the GIPC report, in 2017, the Greater Accra region received about 83% of FDI, and with 6% going to the Ashanti Region. The three northern regions, in most times, receive little or nothing. Over the period, FDIs to Ghana, in terms of value, have been from; United Kingdom, Netherlands, United States of America, France, Germany, Denmark, China and other emerging markets economies. We have also occasionally received flows from Nigeria, South Africa and other developing economies.

WHAT ARE THE GAINS?
There are few empirical studies on the benefits of increasing FDI on economic growth and development in Ghana. But some researchers have observed that from the periods of Vision 2020; Growth and Poverty reduction strategies (I & II); to today, FDI through MNCs have contributed significantly to economic growth. Over the last 15 years, most of the foreign investments have concentrated in the mining subsector, although over period Ghana has made significant strides to attract FDI into the telecommunication, oil and the banking sector. Ghana is expecting higher inflows into the oil industry, as the Italy’s ENI is currently undertaking a huge project on the Sankofa Gas field.

FDIs contribute to economic growth through;

its role in filling the resource gap between targeted or desired investment and locally mobilized savings; needed for infrastructural development;
its role in filling the gap between targeted foreign-exchange requirements and those derived from net export (export – imports) earnings plus foreign Aid and others;
its role in filling the gap between targeted tax revenues and locally raised taxes.

Other benefits to Ghana are through; the transfer of technology and managerial skills to local managers; the utilization of productive resources efficiently; the transfer of modern infrastructure and production processes; human capital development, employment creation, the growing concept of Corporate Social Responsibility (CSR) and, research and development spillovers.

ARE THERE ANY EVILS?
Today, many academicians, political leaders and institutions have put forth the argument that FDI flows in Africa are forms of neocolonialism, albeit disguised. Others have also argued against FDI on economic lines. The proponents of the former argument do not have much interest in the impact of FDIs on economic aggregates like Gross Domestic Product (GDP), Investments, and growth rates of economic variables, but are keen on the philosophical or ideological basis of such flows through the MNCs. Hence, the issue of growing FDI in Ghana must also be analyzed within these two contexts.

From an economic viewpoint, the following negative impacts could befall Ghana; MNCs can undertake excessive repatriation of dividends, profits, interest, royalties, and management fees since Ghana does not have strict repatriations laws; without careful monitoring systems MNCs can take advantage of liberal tax concessions or incentives enshrined in the GIPC and Free Zones Act; the practice of transfer pricing, excessive investment allowances, disguised public subsidies, and tariff protection provided by a few elite cabal in government. All these actions would in turn reduce the targeted tax revenues, foreign exchange reserves and investments that government needs for economic development.

On the other hand, neocolonialism is the indirect method through which foreign powers control developing economies. A developing nation that is thought to be under the influence of neocolonialism has the following features; the export of raw materials at lower prices and import of manufactured goods at relatively higher price; goods from or produced by foreign powers have a competitive advantage in price and quality than traditional or local industries; colonized countries’ economic life is solely dependent on the foreign powers; and the pervasiveness of cultural infiltration and economic exploitation in colonized nations. ^{^[1]}

It has been argued that multinational corporations are not in the development business; their objective is to maximize their return on capital. MNCs seek out the best profit opportunities and are largely unconcerned with issues such as poverty, inequality, employment conditions, and environmental problems. ^{^[2]} Others have argued that FDIs have given way to MNCs who could utilize their economic power, gained through the exploitative markets operations across the globe, to influence government policies and decisions on taxation and development. For example, earlier this year, AngloGold Ashanti, a South African gold mining MNC, received a $250 million tax waiver from parliament, under the logic of employment creation. It must be noted that the AngloGold Ashanti is also the largest, by market capitalization, on the Ghana Stock Exchange (GSE). Could that be the case?

It has also been argued that FDIs would eventually weaken local production and competitiveness, thereby creating economic dependency, for developing nations. And as a concomitant of MNCs, foreign cultural infiltration (especially MNCs in media and advertising industry) would also affect social structures of Ghana.

WHAT CAN GOVERNMENT DO?
Ghana, a middle income country with a GDP of about $47 billion, relatively lags behind on the world’s development ladder. Within this capitalist dominated economic systems, FDI inflows are needed, regardless, for national development. It is therefore necessary, arguably, for us to build strong adoptive capacity (requisite human capital, institutions, social systems etc.), political and macroeconomic stability (crucial variable - inflation pushed by excessive government spending etc.), and infrastructure (eg. energy, transport systems, water etc.) in order to attract a substantial proportion of FDI coming to Africa.

Other strategies are;

The Government of Ghana (GOG) should enforce a more stringent regulation of foreign direct investments.
GOG ought to take tougher bargaining stance during negotiations. China has been successful in this because of its size and strong central government. Ghana, in the future, could take up such bold initiatives through the ECOWAS.
GOG should seek for better deals, by not only looking at the MNCs in developed economies but also the emerging markets and some South economies.
The adoption of performance standards, requirements, and effective monitoring of repatriations and transfer pricing deals.
Gradual increase in domestic ownership and control of MNCs.

The debates and controversies about the benefits and evils of FDIs would still continue in the political and academic circles of Ghana, and these would often be discussed in the context of economic growth and development, and other philosophical or ideological sentiments.

WRITER:
TONYEMEVOR ATTA DANIEL – Managing Partner

The ABIBIREM Consulting Group LLP
[email protected]

[1] Junbo and Frasheri, 2014, p.186
[2] World Investment Report, (New York: United Nations, 2006–2010).