Does Causal Relationships Exist between External Trade and Foreign Direct Investment Flow to Agriculture in Ghana?

Abstract

The paper investigated the short-run and long-run relationship between external merchandise Agricultural tradeand Foreign Direct Investment (FDI) inflows into the Agricultural sector of Ghana. The study employedGranger’s instantaneous causality to assess the short-run relationship and feedback model to investigate thelong-run relationships. Following the existence of unit-roots for the variables as well as cointegration, theToda-Yamamoto procedure was followed for the estimation of the Vector Autoregressive (VAR) models. In theshort-run, the coefficient for FDI inflows and imports were statistically significant. The negative sign pointed toa substitution or replacing relationship between the two variables. The coefficients between exports and FDIthough negative, were not statistically significant. In the long-run, there was a feedback between imports andFDI. Exports caused FDI but not the reverse. Notwithstanding the transitory substitution effect of imports andFDI, in the long-run, imports and FDI complemented each other. Trade and FDI promotion should be pursuedtogether.

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