Does Foreign Direct Investment Crowd-In or Crowd-Out Domestic Investment? Empirical Evidence from Ghana

Developing economies aim to attract foreign direct investment (FDI) inflows to spur growth and close the savings–investment gap. Given the contradictory findings of several research outcomes in different countries, this paper examines whether FDI crowds-out or crowds-in domestic investment in Ghana. By employing the autoregressive distributed lag (ARDL) model on data from 1990 to 2022, the results reveal that FDI exerts a negative and significant effect on domestic investment (crowding-out) in both the long and short runs. The results from other covariates revealed that exchange rate depreciation negatively affects domestic investment, while moderate rates of inflation and GDP growth spur domestic investment in Ghana. The paper recommends that although policies should be implemented to attract FDI, such investments should be geared towards generating or creating new opportunities (complementary effect) for local investors rather than replacing local businesses (substitution effect).