Determinants of private investment behaviour

Abstract

This study analyses the determinants of private investment in Ghana using a time series analysis and complementing it with a cross-sectional one. From many perspectives, the cross-sectional analysis supports the time series analysis. While some of the individual effects of the components of macroeconomic instability are found to be negligible, the overall measure of macroeconomic instability has been a major hindrance to private investment. The results suggest that policies that address only some components of macroeconomic instability may not be enough to revive private investment. The growth of real credit to the private sector has a positive and statistically significant effect on private investment. The question of finance must therefore be addressed in order to ensure continuing participation of the private sector in investment. Private investment and public investment are found to be complementary and thus there is the need for the government to continue to develop the infrastructural base of the economy to boost the private sector. The econometric results suggest that the military takeovers may have created a climate hostile to private investment. The primary objective of the study is to analyse the determinants of private investment in Ghana between 1970 and 1992. For this purpose, we use both time series and cross-sectional analysis. The cross-sectional analysis will be used to determine whether the factors identified in the time series analysis are still constraints to private investment. Specifically, the study seeks to Estimate a time series model with private investment as the dependent variable to determine significant explanatory variables; Identify the factors that are perceived to influence the investment decisions of private manufacturers by surveying manufacturing firms; and To analyse the consistency of the time series analysis with the cross-sectional analysis.

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