GRADUATE SCHOOL OF INTERNATIONAL STUDIES SEOUL NATIONAL UNIVERSITY

Foreign Direct Investment

Attracting Foreign Direct Investment to Ghana: Lessons from the Republic of Korea Submitted to: Hwy-Chang Moon(PhD)

By: George Owusu-Ansah Amoah

Spring 2010

Abstract This article examines the Republic of Ghanas experience in attracting FDI. Thus, the main thrust of this article is threefold. First, it evaluates the main economic policy adopted by the government from 1970 to 2008 to reverse the post independence economic decline. Second, it examines how the policies facilitated the attraction of FDI inflows to Ghana. Finally, it reviews some of the problems that impede the attraction of value-added FDI inflows to Ghana. A thorough analysis is done with the use of the Diamond model of competitiveness to check the attractiveness of Ghana relative to the Republic of Korea (Korea) to ascertain how best to address this issues. This article argues that a lot still is to be done to attract more FDI and it will be profitable for Ghana to use Korea as an example of best practices in terms of policies for improving the attractiveness of the country. Key Words: Inward Foreign Direct Investment, Economic Growth, Diamond Model, Benchmarking, OLI paradigm, Investment Promotion.

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INTRODUCTION: key economic indicators 2000 2005 2007 2008

4.98 GDP (current US$) (billions) 3.7 GDP growth (annual %) 330 GNI per capita, Atlas method (current US$) 49 Exports of goods and services (% of GDP) 67 Imports of goods and services (% of GDP) . Unemployment rate 27.2 Inflation, GDP deflator (annual %) 35 Agriculture, value added (% of GDP) 25 Industry, value added (% of GDP) 39 Services, etc., value added (% of GDP) Source: World Bank Development Indicators, 2009

10.72 14.99 16.12 5.9 6.1 6.2 450 600 670 32 34 37 57 60 63 . . 15.0 13.8 18.0 37 34 32 25 26 26 37 40 42

Ghana had a population of 23.5 million, a gross domestic product (GDP) of $16.12 billion and a per capita income of approximately $670 in 2008. During the past 20 years, the annual economic growth rate in the country has averaged over 4 per cent. The economy slipped into a crisis in 1998, but has recovered in recent years. Reforms being carried out under Ghanas Vision 2020 plan, formulated in 1994, seek to transform the economy into a middle-income country by the year 2020. The plan envisages growth of the countrys GDP at an accelerated rate of 8 per cent per annum. The Government further set up development goals to revitalize the private sector as specified in the National Medium Term Private Sector Development. Ghana actively embraced the policy prescriptions of the World Bank and the International Monetary Fund (IMF) and since the early 1980s; it has been faithfully implementing market reforms and has promoted the private sector as the primary engine of growth for the economy. A structural adjustment programme was launched in 1983, and the free market orientation of that programme continues to define Ghanas policy objectives. There has been progress with structural and macroeconomic reforms since 1984 and this has resulted in sustained output growth and increased private sector activity and investment over the past two decades. The importance of FDI as a factor in development has been recognized by Ghana since the 1960s, and the climate for FDI improved considerably after it moved towards a market economy even though a lot more still needs to be done since at the developing stage of the economy, there is a positive relations between GDP growth and FDI (Moon et. al. 2009). However, Ghanas domestic market is relatively small considerably smaller, for instance, than those of its two neighbours most likely to compete with it for FDI, Cote dIvoire and Nigeria. Korea on the other has comparatively achieved greater success in attracting FDI. This shows by amount of FDI attracted so far and the ranking it has in international indicators like Ease of doing business 2010 index (19), Global Competitiveness Index 2009-2010(19) and other major indicators compared to Ghana who is 92 and 114 respectively and falls between 80 and 130 in the same ranking. Hence there is a lot to learn from Korea. This paper therefore seeks to study and use Korea as a benchmark for improving the FDI attractiveness of Ghana. The rest of this paper is organised as follows; Section 2 reviews the current status of world FDI, followed by the World FDI performance so far in Section 3. In Section 4, we will review the FDI performance of Korea and government policies in attracting FDI. Section 5
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reviews existing theoretical literature and analytical models necessary for our analysis which should facilitate a comparison of Ghana to Korea and provides a brief review of possibilities for investment in different industries in Ghana and Section proposes a strategy and government policies needed to attract FDI inflows into the country then finally, Section 7 concludes. 2. CURRENT WORLD FDI STATUS: FDI flows in general experienced a decline from 2008 by 20% after a record 2007 high of about $1.8 trillion and were expected to recover slowly in 2010 to about $1.4 trillion and finally gain momentum in 2011 due to the impact of the world economic crisis. However, FDI flows in developing countries especially Africa and Asia increased whilst those in developed countries decrease since they were most affected by financial crisis (UNCTAD, 2009). According to the UNCTAD report, the fall in global FDI in 2008-9 is the result of two major factors affecting domestic as well as international investment thus the capabilities of firms to invest has been reduced by a fall in access to financial resources (reduced access to finance) and the propensity to invest has also been affected negative by economics prospects especially in developed countries (gloomy prospects). Companies investment plans were also scaled back due to high level of perceived risks and uncertainties so they can develop resilience to possible worst-case scenarios regarding financial and economic conditions (risk aversion). Finally, even though there was a rise in divestment and restructuring of operations of companies by shutting down factories or selling to other companies and also cross boarder M&As were sharply affect as a direct consequence of the crisis (about 17% decline), Greenfield investments seem to have been quiet resilient to the crisis considering such investments at the beginning of 2008 exceeded that of 2007. According to the report, this situation has two major consequences for FDI in 2009 and onwards. First, it could have a lasting negative effect on the dynamics of FDI flows, due to its forceful impacts on market growth and financial resources. Second, it creates a situation of widespread uncertainty regarding the future evolution of FDI and notably the date and conditions of a future pick-up of flows. However, positive driving forces remain at work. There are a number of reasons why TNCs might remain committed to FDI, even in the midst of the crisis; a number of large emerging economies, such as Brazil, China, India and the Russian Federation, have remained attractive to FDI, particularly to market-seeking FDI. They maintained relatively high economic growth rates (compared to advanced economies) in 2008. As prospects continue to deteriorate in developed countries (more markedly than in developing ones), investors will favour the relatively more profitable options available in developing countries, the financial crises and tough economic periods also offer opportunities to companies to buy assets at bargain prices and take advantage of large-scale industry consolidation in some activities. For aggressive, cash-rich TNCs or those from cash-rich countries the acquisition of undervalued assets may boost their investment in both developed and developing countries, depending on the circumstance and opportunities. Dramatic exchange rate and share price falls may lead to a round of acquisitions targeting bargain assets in a number of countries, and a possible wave of consolidations in certain industries, such as oil and gas, metal mining, automotive industry and financial services. A number of companies have already taken advantage of such opportunities, companies are still committed to increasing their level of internationalization in the medium term, a finding which constitutes a significant indicator for a future upturn in FDI flows, and new sources of FDI have emerged, especially from the Southern Hemisphere. Emerging economies and countries well-endowed with natural resources like Ghana are becoming a growing source of FDI, either through the internationalization strategies carried out by their TNCs, or through
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the investment activities of their Sovereign Wealth Funds (SWFs). TNCs from the South, in particular, are likely to continue to be active international investors. This will help boost FDI to developing countries, such as Viet Nam (where most FDI is from other developing countries), which is expected to register record FDI levels in 2008. Chinas outward FDI will remain oriented upwards, as indicated in late 2008 by Chen Jian, its Vice Minister of Commerce and many quickly-growing industries are presently characterized, even in the midst of the present crisis, by very promising FDI prospects. But the UNCTAD report was quick to point out that whether these positive factors will offset the impact of the financial constraints facing firms and the reduced demand and slower economic growth in many parts of the world remains an open question. Figure 1

GHANAS FDI PERFORMANCE: Ghana has had moderate success in attracting FDI in recent years. Annual FDI flows to the country declined from $244 million in 1999 to $59 million in 2002, but began to rise again in 2003, reaching $156 million in 2005 and $2120.41 million in 2008 respectively. The Ghana Investment Promotion Centre (GIPC) recorded 152, 183 and 212 investment projects in 2003, 2004 and 2005, respectively, valued at $567 million over the three-year period. On the basis of the magnitude of FDI stock by 2005, Ghana ranked only 20th among African countries. In terms of average annual FDI inflows during 2002-2005, the country ranked only 24th. However, in 2004, it ranked 16th in Africa according to UNCTADs Inward FDI Potential Index, an index which measures a countrys potential attractiveness for FDI inflows. (UNCTAD, 2006). This suggests that the level of FDI to Ghana has not been commensurate with its potential, even in comparison with other African countries. Ghana has political stability and is free from social conflicts prevalent among its major neighbours: Nigeria, Liberia and Sierra Leone, and even Cote dIvoire and Burkina Faso. It has larger natural resources and agricultural potential than its Sahelian neighbours, and labour cost is much lower than in other parts of the developing world. In a continent where many countries are landlocked, Ghana has good ports that allow shipping directly to the United States and Europe. It is a member of the WTO, benefits from trade preferences accorded by the EU to African, Caribbean and Pacific (ACP) countries and is beneficiary of the African Growth and Opportunity Act (AGOA) of the United States. It has a liberalized telecommunications sector and many Internet providers. It also has one of the few well functioning stock exchanges in 3.
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Africa, and provides a wide range of incentives for foreign investors. 3.1 FDI TRENDS IN GHANA: Figure 2:

Source: UNCTAD, FDI database (www.unctad.org/fdistatistics). The above diagramme shows trends in FD inflows into Ghana over the period 1970-2008. Stage 1 (1970-1980): There were regulatory restrictions well in place. From 1972-1978, 100 percent foreign ownership of firms was not allowed and therefore such firms converted into joint ventures with State-owned or Ghanaian private-sector firms. Stage 2 (1980-1992): There were relatively low levels of inflows until 1992. Ghana actively embraced the policy prescriptions of the World Bank and the International Monetary Fund (IMF) and since the early 1980s; it has been faithfully implementing market reforms and has promoted the private sector as the primary engine of growth for the economy. A structural adjustment programme was launched in 1983, and the free market orientation of that programme continues to define Ghanas policy objectives. Stage 3(1993-2008) The relatively higher levels of FDI inflows coincided with the period of economic and political reforms, albeit with a time lag. The post- 1992 period marked the period of transition from a military regime (but stable government) to a constitutional democracy. The government, as part of economic reforms, enacted the Investment Code and Minerals Act and this was later revised by the GIPC Act 1994, which, as already mentioned, provides generous incentives for investment in Ghana. Thereafter, there was a more than tenfold increase: from an annual average of $11.1 million during 1980-1992, to $337.06 million during the period 1993-2008.
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Types of FDI: There are two main types of FDI inflow in Ghana and they are as explained below: (a) FDI aimed at the domestic market Foreign firms have been successfully established in Ghana to provide goods and services for the domestic market. Nestle is the largest producer of processed foods there, and British American Tobacco dominates the domestic cigarette market. Foreign firms prominent in the beverages industry are: Coca Cola, the largest soft drinks producer in Ghana and Guinness PLC. The largest textile firms in Ghana, GMC and GTMC, are affiliates of TNCs from the Netherlands and Hong Kong (China) respectively. Other large foreign firms in the manufacturing sector include, for instance, Ghacem and Unilever (Ghana). A number of foreign firms have also taken leading roles in the services sector. Standard Chartered, Barclays and the Ghana Commercial Bank dominate the banking sector. TNCs are also involved in the provision of infrastructure services and utilities. The major telecommunications company, Ghana Telecommunications, was once controlled by the Malaysian State-controlled Telekom Malaysia (which pulled out in 2002). Another Malaysian group controls the television station TV3 and the film group GAMA. Finally, many Indian, Lebanese and Syrian businesses serve the domestic and tourist markets through general trading, import, export and the hospitality sector. Some Indian businesses have also diversified into a range of manufactures, including plastics, packaging and jewellery and ICT. (b) Export-oriented FDI I. Natural resources extraction: Many Foreign firms in invest in Ghana engage in the extract of raw materials for export. There is high proportion of Greenfield FDI projects in the natural resource sector. The major traditional exports are gold, cocoa and timber. The mining sector is dominated by firms such as AngloGold Ashanti Mining Company, with a large foreign participation, Gold Fields Ghana Limited (a subsidiary of Gold Fields Limited of South Africa) and Teberebie (until recently 90 per cent owned by the Pioneer Group in Boston). Aluminium also constitutes a major export: Valco (Volta Aluminium Company Ltd), 90 per cent owned, till recently, by the Kaiser Corporation (United States), the largest United States investment in the country, has the largest aluminium smelter in Africa. Almost all of the companys output of aluminium ingots has been exported to the United States. II. Manufacturing for export: Export-oriented FDI in manufacturing is a recent trend except in areas of wood processing or products. Pioneer Food Cannery is one of Ghanas largest companies, processing locally caught tuna for StarKist (a subsidiary of Heinz). Gafco (Germany) also processes tuna, sardines and wheat flour. West African Mills in Takoradi is a German owned processor of cocoa butter, while the Swiss company Barry Callebaut (Gh) Ltd. Processes cocoa. There are now also a series of firms involved in sectors such as plastics (e.g. the Indian-owned Top Industries Co. Ltd. and Letap Plastics), auto spare parts (e.g. the Indian-owned Automotive Springs or the Korean joint venture, Crystal Auto) and jewellery (e.g. the British-Indian La Mode de lAfrique, or the Indian group Letap). (c) Infrastructure and utilities Foreign firms have had a long and successful history of working in construction and power supply in Ghana, playing a lead role in the countrys construction industry. The premier construction company, Taysec, a branch of Britains Taylor Woodrow, has been
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operating successfully in Ghana since 1947, well before independence. Other British and American firms have also been involved in construction, as have Chinese firms more recently. A number of energy projects, some in response to the energy shortages of 1998, involve foreign firms. These include projects by the United States company, KMR, the Royal DutchShell-Chevron West African Gas Pipeline from Nigeria, and the United Kingdom company, Dana Petroleum. With the purchase of a share in the major telecommunications company by a Malaysian firm, foreign investors have also entered the telecommunication services sector in Ghana. However, the foreign investor (Telekom Malaysia) pulled out after the Government of Ghana made a decision not to renew its technical and consultancy services agreement. 3.2 Experience of foreign firms: (a) General experiences Before the introduction of trade liberalizing reforms in the 1980s, many firms that serviced the domestic market were protected from import competition by high tariff barriers. However, since then, many of them, in order to survive, have had to adapt and become more competitive and innovative in terms of both pricing and product quality. These include foreign-owned firms, a typical example being Unilever Ghana Ltd. A large number of firms, most of which were SMEs owned mainly by Ghanaians, could not survive the competition and folded up. Some companies have had a chequered history with various governments. Under the leadership of General Ignatius Kutu Kwasi Acheampong (1972- 1978), 100 per cent foreign ownership of firms was not allowed and therefore such firms converted into joint ventures with State-owned or Ghanaian private-sector firms. Some of these continue today as joint ventures, while others have regained full foreign ownership. The Hong Kong-controlled group, GTMC, is an example of the former and Taysec (United Kingdom) of the latter. Also, a variety of ownership structures appear to function well in Ghana. Usually, many firms succeeded with a mixture of foreign and government participation: the Ghana Agro-Food Corporation is 25 per cent government owned and 75 per cent Swiss-owned, while Barclays Bank of Ghana is 10 per cent government owned. Most notably, the Government has a large stake in Ashanti Goldfields. Historically, many firms that have been successful in Ghana have been large and they are typically owned by TNCs from the United Kingdom, the United States or continental Europe. Asian firms (and Indian firms in particular), barring a few recent exceptions, have historically been involved in small-scale trading. But this is now changing. As mentioned earlier, in the mid-1990s, Malaysian companies bought into the major telecommunications company (Telecom Ghana) and the media (TV3 and GAMA Media Systems). They have also become involved in infrastructure investment through the Business Focus Group (Ghana), the key firm in the development of the free zones at Tema, and through a 40 per cent share in PSC Tema Shipyard Ltd. Groups from China and Hong Kong (China) are involved in construction, garments and textiles. Indian firms have become big players in plastics, but no Japanese firms are involved in manufacturing.

4.

KOREAS FDI PERFORMANCE:

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Figure 3: FDI lows to Korea, 1970-2008

The first stage (1962 83) investment restriction stage: Although FDI in Korea was permitted after1962; Korea had to rely heavily on external loans for economic development and did not wish to attract inward FDI, aiming at limiting foreign equity participation in major industries or in exports. As Korea failed to pay foreign debts in the 1980s, policies were adjusted to attract FDI rather than loans. Foreign investors were welcomed into the light manufacturing export sector. However, the overall position of Korean government was to keep FDI to a minimum, and the FDI policy regime of Korea was still very restrictive. During this stage, the FDI into Korea was minimal around 100 million. The second stage (1984-92): The government no longer imposed 50 percent ownership ceiling on foreigners in limited sectors, but it still protected major domestic firms rather than promoting competition in the domestic economy by attracting FDI. As a result, the change in policy did not bring about an actual increase in FDI.
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The third stage (1993-97): The negative effects of the heavy and chemical industry promotion plan of the 1970s led the government to adopt a new industrial strategy in the early 1980s in an attempt to upgrade Koreas industrial structure into one that is more consisted of technology intensive sectors. The government recognized FDI as a key channel of gaining technological improvement. With the introduction of the comprehensive five-year FDI liberalization plan in June 1993, regulations were relaxed, Koreas market was opened up to foreign investment and inflows started to increase. Then, when Korea joined the Organization for Economic Cooperation and Development (OECD) in 1996, the Korean FDI regime was adjusted in line with the international norms and standards, resulting in a flow of FDI. One of the incentives of this stage was an exemption of rents for high-tech investments over 20 million $ and for investments in the manufacturing sector over 200 million $. FDI started an upward trend, reaching 2.6 billion $ in 1997 from in 500 millions $ in 1993 The fourth stage (1998 2008): Starting from 1998, one year following the onset of the Asian Financial Crisis changed because Korea adopted a more liberal economic policy which included opening its capital and real estate markets to foreign investors. The Foreign Investment Promotion Act, passed in 1998, enabled the government to launch a more aggressive campaign to attract foreign direct investment (FDI). The governments efforts to accelerate Koreas recovery from the crisis by inducing foreign capital paid off handsomely, although that recovery was partly attributable to the buoyancy of the global economy. The FDI inflows of Korea increased nearly double, from $5 billion in 1998 to $9 billion in 2000. However, the September 11, 2001 attacks in the United States and the burst of the Internet bubble in the same year reduced global liquidity and subsequently started a downward trend in inward FDI into Korea to about $4 billion. After a period of trial and error, the government finalized its comprehensive plan for foreign investment attraction in 2003. The Korea Investment Service Center was established to offer one-stop service, providing administrative support. In addition, the Office of the Investment Ombudsman was established as a means to resolve difficulty experienced by investors in Korea and to enhance the overall business climate. As a result, FDI inflow resumed an increasing trend and the inbound FDI amount in terms of notifications averaged over US$10 billion for five consecutive years until 2008

Figure 4: Koreas inbound FDI by Type, Sector and Region of origin

Source: Ministry of Knowledge Economy, Korea

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KOREAN GOVERNMENT POLICY AND INCENTIVES ON INBOUND FDI: According to Invest Korea, after the foreign exchange crisis in 1997, the Foreign Investment Promotion Act was enacted into law in 2008. Supported by active market liberalization as well as a system to encourage foreign direct investment, inbound FDI into Korea saw a rapid increase in the following decade, becoming an important pillar of the Korean economy. In 2009, with the paradigm shift in the global industry including an increased focus on green growth, and in preparation for a global economic recovery, the Korean government has established a plan to expand inbound FDI into Korea as follows. First, among all industrial sectors, areas with a focus on green growth were selected and 17 new industrial growth engines have been given full government support, substantially raising the competitiveness of Korea as an attractive destination for FDI. Furthermore, the Prime Minister has been named the Chairman of the Foreign Investment Committee, and an accountability system placing responsibility on Koreas ministries and foreign investment related agencies was adopted so as to focus the full capacity of the government on FDI attraction. A high level team is organized to improve the investment environment for foreign capital in order to address issues that deterred investment on the spot. Furthermore, in order to facilitate investment into Koreas Free Economic Zones at an earlier point, the government has eased regulations on development procedures, provided assistance for early construction of infrastructure, and allowed early development of available land on a large-scale basis, as well as increasing the acceptable proportion of students of Korean nationality in foreign educational institutions. Incentives for foreign companies investing in Korea The purpose of offering FDI incentives is to compensate foreign companies which decide to invest in Korea for their economic contributions and to assist them with costs related to establishing new business operations in the country. The government currently offers tax relief to foreign companies with the potential to make major contributions to the Korean economy, provides them with industrial sites or assists them with site location and acquisition, and provides cash grants and other types of financial support. Cash grants have been available from 2009 for foreign investment in high-tech industries and in sectors that are likely to create new jobs. Land within Foreign Investment Zones designated to the parts and material industries can be rented with a higher level of discount. Financial support for the construction and extension of international schools are available in the acquisition of sites and construction costs according to ordinances set by local governments. OTHER INCENTIVES: Invest KOREA has been holding the Job Fair for Foreign-Invested Companies in Korea, for the past four years. Through this initiative, Invest KOREA aids in resolving the recruiting efforts of foreign companies while promoting promising job opportunities to Korean job seekers, thus raising the public awareness of foreign investors contribution to the national economy.

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5.

LITERATURE REVIEW: Dunnings (1998) eclectic theory of FDI, also known as the OLI paradigm, brings together a number of explanations for FDI that can be classified either as ownership-specific advantages (O), location-specific advantages (L), or internalization advantages (I). Ownership-specific advantages arise because FDI allows a business organization to retain ownership of its foreign subsidiaries (though FDI may involve control without full ownership). Ownership enables the firm to enjoy exclusive use of patents, technology, research, management, supply chains, financial sources, and marketing techniques. Thus, these factors enable the business organization to reap the benefits of economies of scale. Location-specific advantages relate more closely to the traditional theories of FDI. Location provides access to raw materials, low-cost labor, and markets. He argues further that given the relative immobility of labor, it makes sense for a business organization to take advantage of this cheap labor when a labor-intensive production is involved. Location may also help a business organization to avoid trade barriers and other government restrictions. Internationalization advantages arise because FDI allows a firm to remain or become integrated. The process of integration via horizontal and/or vertical integration enables a firm to internalize its operations within the group and thereby reduce the transaction costs that would otherwise arise between two independent business organizations. Boateng and Glaister (1999) observe that while ownership-specific advantages, internationalization advantages, and location-specific advantages are important determinants of FDI, it is only location-specific advantages that can be influenced directly by the host government actions, as the first two determinants are firm-specific. Ownership advantages such as those discussed by Hymer (1970) are not only firm-specific, but also refer to the core competencies that give the company a comparative advantage vis-a-vis rivals in the alien environment, and more than offset the advantages that host country firms have already developed. Afriyie (1998) observes that although Ghana is rich in supply of land-intensive goods such as agricultural products, mineral resources, and so on, it attracted a relatively negligible amount of FDI during the 1980s. According to Boateng & Glaister (1999), although natural resources are an important determinant of FDI inflow, if Ghana is to attract significant FDI, it must be prepared to offer foreign investors new sources of competitive advantage rather than rely on natural resources alone. As part of the incentives being offered by the state to attract more foreign investors and their investments, Ghana has not only removed restrictions that militate against FDI inflows, but also offers commitments under the reform program at the bilateral level to protect investors and their investments. Ghana has to date concluded 21 Bilateral Investment Promotion Treaties (BITs). Some have been ratified, while others are still awaiting ratification (GIPC, 2003). In developing countries that possess a large and growing internal market or substantial productive resources, and in countries that are in geographical proximity to the major developed country market, changes in policies and regulations can prove instrumental in helping to attract greater amounts of FDI. Such appears to be the case in China, India, the Republic of Korea and, recently, Mexico. At the same time, the experience of developing countries with policy changes suggests that blanket liberalization may be less effective than changing or adopting specific regulations or elements of policy toward MNCs. In addition, some policy changes may be effective in certain economic conditions and ineffective in others. Developing countries have long had policies that have sought to regulate the entry and operations of MNCs and limit foreign ownership of domestic operations. Many of these policies were modified in the 1980s and made regulations more flexible. These changes contributed to improving the climate for FDI in a number of countries including Ghana and the Southeast Asian nations (UNCTAD, 1993).
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FDI INWARD-OUTWARD FLOWS AND STOCKS: In the 1970s, FDI sources and flows to developed countries, notably the Triad nations (United States, Japan, EU) grew steadily, while FDI to developing countries followed an uneven path and made up only 12% of all financial flowsbut have risen since 1996 to an unprecedented amount of U.S.$285 billion. The fluctuating nature of private flows has played a key role in this (Overseas Development Institute [ODI], 1997). Between 1981 and 1984, there was a sharp fall in private lending as international banks lost confidence in borrowing countries financial stability following the debt crisis in 1982. FDI is also very concentrated within each region, with the three top recipients accounting for more than half of FDI inflows. In 2000, Angola, Egypt, and Nigeria represented 50% of total FDI inflows into Africa; Brazil, Argentina, and Mexico 66% in Latin America and the Caribbean; while Hong Kong (China), China, and South Korea accounted for 80% of FDI inflows to Asia (UNCTAD, 2001). On a global scale, developing countries only attract marginal amounts of FDI; in the year 2000, the total inflows to developing countries were only 21%. On the other hand, the importance of developing countries as hosts has been slightly growing in the past two decades. Ofosu and Hansen (2002) argue that FDI flows to SSACs are the lowest in global flows of FDI. They observe that even though African countries benefited from a rise in FDI flows in the 1990s, the overall level of flow was much less than flows to other developing countries, leaving Africas potential for FDI underutilized. One of the most positive trends in developing countries has been the increasing importance that private capital flows have assumed over the past decade. Private capital flows totaled 87% of all net long-term capital flows to developing countries in 2000, compared with private capital flows of 43.2% in 1990. Between 1990 and 2000, they averaged 75%. Among these, FDI is by far the largest and most stable source of capital, at around U.S. $180 billion in 2000, approximately 70% of total private flows (World Bank Development Indicators Database, 2000). Recent statistics demonstrates that China remains the largest recipient of FDI flows, with a total receipt of U.S. $213,925.0 million between 1997 to 2001 among the low-income countries, followed by Hong Kong (China), with a total receipt of U.S. $135,906.0 million, and Brazil, totalling U.S. $131,663.6 million during the same period. Between 1997 and 2001, Nigeria, as an oil-exporting country, remained the largest recipient of FDI in West Africa, with a total receipt of U.S. $5,634.4 million despite its erratic and relatively inhospitable policies. Ghanas total receipt of FDI during the same period was only U.S. $404.3 million. Ghanas inward FDI Performance Indexthe ratio of a countrys share in global flows to its share in global GDPwas only 0.3% between 1998 and 2000 (UNCTAD, 2002). Even though this high concentration in the Asian countries is often proportionate to the size of the country (which mostly reflects the amount of potential sales), it also illustrates the fact that many African countries, including Ghana, have not yet been able to attract the full potential flow of investment, notwithstanding the limited degree of success of their liberalization efforts. The world FDI inward stocks in 2001 were U.S. $6,845,723 million, compared to U.S. $6,258,263 million in 2000. The annual average percentage of Gross Fixed Capital Formation (GFCF) was 21.9% in 2001, compared to 20.0% in 2000. The world FDI outward stocks amounted to U.S. $6,552,011 million in 2001, compared to U.S. $6,258,263 million in 2000. The annual average of GFCF fell from 21.9% in 2000 to 21.1% in 2001 (UNCTAD, 2002). The share of FDI inward stocks in developing countries in 2001 was U.S. $2,181,249 million, compared to U.S. $2,002,173 million in 2000. The annual average of GFCF rose respectably from 30.9% in 2000 to 33.7% in 2001. The share of FDI outward stocks also rose from U.S. $751,632 million in 2000 to U.S. $776,065 million in 2001. The annual average of GFCF increased from 11.9% in 2000 to 12.6% in 2001. The share of FDI inward stocks in Africa increased from U.S. $142,379
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million in 2000 to U.S. $158,840 million in 2001, an incremental change of annual average of GFCF of 3%, from 25.5% in 2000 to 28.5% in 2001. The total FDI outward stocks in Africa in 2000 were U.S. $47,249 million but fell to U.S. $44, 583 million in 2001. The annual average of GFCF also fell by 0.5%, from 9.2% in 2000 to 8.7% in 2001 (UNCTAD, 2002). In Nigeria, inward FDI stocks increased from U.S. $20,184 million in 2000 to U.S. $21,289 million, with an increase in annual average of GFCF from 49.1% in 2000 to 51.8% in 2001. Outward FDI stocks also increased from U.S. $4,358 million in 2000 to U.S. $4,452 million in 2001, with just a slight increase in annual average of GFCF from 10.6% in 2000 to 10.8% in 2001. Ghanas inward FDI stocks rose from U.S. $1,257 million in 2000 to U.S. $1,347 million in 2001, a respectable increase in annual average of GFCF from 24.2% in 2000 to 25.9% in 2001. The outward FDI stocks also experienced an increase from U.S.$359 million in 2000 to U.S.$412 million in 2001, with an increase in annual average of GFCF of 1.0%, from 6.9% in 2000 to 7.9% in 2001 (UNCTAD, 2002). One of the factors that have a negative relationship with FDI inflows is political risk. Lecraw (1991), Nigh (1986), and Nigh and Schollhammer (1987) found political risks in developing countries to be significantly negative for the attraction of FDI. According to an ODI briefing paper (1997), the ranking of political risk among FDI determinants is somewhat unclear. Particularly where the host country is rich in natural resources, no further incentive may be required, as seen in the case of politically unstable countries such as Nigeria and Angola. Emery, Spence, Wells, & Buehrer (2000) have found that administrative procedures can form a significant barrier to FDI inflows, especially in developing countries. Once a decision to locate has been made, the implementation process can be tedious. They cite the example of Ghana and Uganda, where it can take up to two years to establish a business and become operational. The importance of perceived levels of corruption in investor decision making processes cannot be underestimated. Van Vuuren (2002), among several other empirical studies, shows, in fact, that corruption, complex and nontransparent regulatory framework, as well as property rights, all hamper the attraction of FDI. The overarching observation of this work is that research findings based on actual incidences where foreign investors decided not to invest because of corruption are hard to come by. He argues that some anecdotal evidence, however, supports the ranking given to corruption as a decisive factor in influencing capital inflows. As an example, the author uses the case of Zimbabwe, which lost a hotel complex investment worth U.S.$55.8 million to Zambia when Sun International chose to relocate there in 2000, citing problems associated with unnecessary red tape and demands for bribes by those in positions of authority. Wei (1998) studied the effect of corruption on FDI. The central finding of that research is that a rise in either the tax rate on multinational firms or the corruption level in a host country reduces inward FDI. As advanced nations become more affluent, they continue to pursue FDI in geographical areas that have economic growth potential. A European Commission (2002) working document observes that many of the determinants of FDI are clearly exogenous to government policies and control, such as geographical position, country size, and availability of natural resources. The most robust empirical finding concerns country size, with which FDI is positively correlated.

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5.1

Analytical Framework The main theory for the analytical framework of this research is Porters national competitiveness analysis model, usually described as the Diamond Model. Michael Porter states as the basis of his model that National prosperity is not inherited but created, in his transformation of the traditional economic paradigm, which persisted for more than 200 years since Adam Smith published his seminal Wealth of Nations in 1776. Porter proposed a more comprehensive model for understanding national competitiveness through his Diamond Model, which includes the traditional production factors and other important variables that the traditional paradigm did not consider. The Diamond Model assesses national competitiveness through four endogenous variables such as Factor Conditions, Demand Conditions, Related and Supporting Industries, Firm Strategy, Structure and Rivalry, and two exogenous variables (Government and Chance Events). Although Porters Diamond Model advanced the field of national competitiveness analysis to unprecedented heights, it failed to capture the global aspects of competitiveness in the era of globalization. Accordingly, a group of scholars including Moon, Rugman and Verbeke developed the Double Diamond Model, which incorporates an international dimension to Porters domestic Diamond. In this research, we use the Double Diamond Model and new models for assessing FDI attractiveness and analyzing the impact of foreign investing firms on host economies have been developed (see Moon et al, 2009). Moreover, we advance the existing theories proclaiming the competitive advantage and propose the FDI attractiveness enhancement strategy in the perspective of the theory of disadvantage. Meanwhile, Dunning proposed the OLI paradigm, which explains FDI in terms of ownership advantage, location advantage and internalization advantage. This research combines the Double Diamond Model, developed from the original Porters single Diamond Model and the OLI paradigm, and develops a fundamental targeting strategy for attracting FDI into Ghana.

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Figure 5: SWOT-Diamond Model of Ghana

Figure 6: SWOT-Diamond Model of Korea

6.

BENCHMARKING : Lessons from Korea for Ghana Figure 7:

Based on the analysis so far Ghana has been experiencing a moderately increasing trend in the inflow of FDI and capital accumulation. The motivation for TNCs investing in Ghana is, as pointed out in the above diagram, natural resource exploitation. This has had a positive effect on the national income of the country. This places Ghana at the third at the third point on the diagramme which is natural resource and cheap labour. However more needs to be done to attract more FDI into the country in order to help increase the GDP through improving the investment environment. According to the Theory of Disadvantage, advanced countries attract FDI that relies more on superior business environment without significant disadvantages (Moon et al. 2009). In this regard, Ghana can work on strengthen its strength and mitigate its weakness by using Korea as an example of best practices and learn from policies implemented by Korea in attracting FDI since this will lead to a more stable and sustainable inflow of FDI. The following is recommend based on the SWOT analysis in order as the author deems important: A. Improve upon quality control standards and health services and overall living environment. B. Ghana should the issue of lack of information on the opportunities available in the country for foreign investors. This can be done by providing one-stop service centre for foreign investors and also creating linkages between TNCs and domestic economy thereby creating networks. C. Stablise the macroeconomic environment of Ghana especially with regard to inflation and interest rates. D. Improve upon the availability, reliability and cost of basic infrastructure base of the country. The infrastructure must be very business friendly. E. Improve upon regulations, especially on FDI through the strengthening of the Ghana Investment Promotion Centre1 to ensure market-oriented reforms that will

UNCTAD, 2002a: The roles include provision of efficient after investment service, improved data collection,

F. G. H.

I. J. K. L. M. N.

narrow the gap between Ghana and its competitors. Skill upgrading of labour through quality education and training in order to increase productivity especially in the area of management and marketing. Improve industrial relations and also structure well the employment market. GIPC like Invest KOREA should hold Job Fairs for Foreign-Invested Companies in Ghana. Through this initiative, GIPC can aid in resolving the recruiting efforts of foreign companies while promoting promising job opportunities to Ghanaian job seekers, thus raising the public awareness of foreign investors contribution to the national economy. Technology upgrade and industrial upgrade through Research and Development. Development industrial cluster with good and quality design. Reduce level of corruption to the minimum. Improve social safety net. Promote and support entrepreneurial initiatives and drives. Strengthen international networks through international cooperation especially in Africa. This is necessary in improving the image of Africa collectively in the eyes of the global investor.

7.

CONCLUSION: Ghana has rich potential for growth but the country lacks the technical expertise and capital in many industries. In order for Ghana to achieve its goal of becoming a middle income country by 2015, it must achieve a stable and sustainable growth rate of 6 percent on average, FDI is an efficient way to achieving this goal. Basically improving the attractiveness of the country as a place for investment is the key challenge now. To address this challenges effective, this paper this applied the SWOT analysis with of the indicators of the Diamond model and Moons New Model for Assessing Investment Attractiveness in the analysis of FDI in the country after reviewing important and related literature on FDI. Secondly, this research analysed the investment environment of Ghana and Korea, the bench mark country for Ghana, and derived policy recommendations. Finally, this research proposes that for Ghana to be a strong competitor in Africa, it must maintain or build upon its strength whiles mitigating its weakness and the relative success of Korea in the area of attracting FDI should serve as an example of best practices Ghana can emulate. This study can further be developed into a more in-depth analysis of each determinant of the diamond by Sector and Industry2 and also at the firm level.

professionalizing the GIPC, more detailed sector profiling, greater prioritizing of sectors and studying failed investments. 2 Mining, Light Manufacturing, Agriculture, Tourism, Utilities and Energy (especially recent discovery of oil in commercial quantity. 19

REFERENCE: Bark & Moon, 2007, The role of inward FDI: A case study of foreign firms in Korea, Routledge and UNCTAD Boateng, A and Glaister, Keith, W. (2003) Strategic Motives for International Joint Venture Formation in Ghana, Management International Review, Vol. 43, No.2, 2nd Quarter, pp. 107 128. Dunning, 2000, The eclectic paradigm as an envelope for economic and business theories of MNE activity, International Business Review Ghana Investment Promotion Centre, 2009, 2nd Quarterly investment report, http://www.gipc.org.gh/publications.aspx Investment environment and business opportunities, 2009, Invest Korea, www.investkorea.org Moon, 2004, The evolution of theories of foreign direct investment, Review of Business History Moon et al. 2009, Assessment of FDI attractiveness (Executive summary) Moon, H. C., 2005, Economic Cooperation between Vietnam and Korea through Foreign Direct Investment UNCTAD, 2006, World Investment Report: Ch.5, Impact on Home and Host Developing Economies UNCTAD, 2009, Assessing the impact of the current financial and economic crisis on global FDI flows. UNCTAD, 2009, World investment report, Transnational Corporations and the Infrastructure Challenge. UNCTAD, 2008, World Investment report, Transnational Corporations, Agricultural Production and Development. UNCTAD survey, 2003, Invest Policy Review, Ghana UNCTAD, 2007, Asian Foreign Direct Investment in Africa, Towards a New Era of Cooperation among Developing Countries Vale Columbia Center, 2009, Handbook for promoting FDI in cities in emerging markets, Columbia University.

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