Greenfield investment and job creation in Ghana: a sectoral analysis and geopolitical implications of Chinese investments

The role and impact of multinational corporations (MNCs) and their foreign direct investment (FDI) on job creation in developing economies, particularly in Africa, is a subject of ongoing debate. While proponents highlight the potential for economic growth, technology transfer, and job creation, critics raise concerns about potential negative impacts. This research focuses on Ghana, a strategically important nation given its role as the secretariat of the African Continental Free Trade Area (AFCFTA), and its increasing attractiveness as an FDI destination. The central research question is: Does Greenfield investment in Ghana lead to significant job creation in the formal sector? The study differentiates between Greenfield and Brownfield investments, a crucial distinction often overlooked in previous research. The burgeoning FDI activity in Ghana, especially from China and the US, provides a compelling context for assessing the impact of diverse investment strategies on job creation and broader economic development.

The literature review traces the history of MNC involvement in Ghana from the colonial era to the present, highlighting key legislative changes aimed at attracting FDI. These include the Capital Investment Act (1963), subsequent Investment Codes, and the Ghana Investment Promotion Centre Act (1994 and 2013). The review examines existing research on the relationship between FDI and employment in Ghana, noting both supportive findings of a positive correlation and those emphasizing the short-term limitations or sector-specific nuances. The role of different source countries, notably China, the US, India, and South Africa, and their sectoral investment preferences are also discussed. The review acknowledges the debate surrounding the benefits and drawbacks of MNCs in developing economies, citing contrasting perspectives on their contributions to poverty alleviation, human rights, environmental sustainability, and income inequality. The discussion includes the perspectives of scholars like Bhagwati, Cohen, and Nunnenkamp, showcasing the complexities and nuances of the FDI-development relationship. The Washington Consensus and its implications for FDI's effects on developing countries are also mentioned.

The study utilizes a dataset combining time-series and cross-sectional data. The FDI data, obtained from FDI Markets, covers 500 investment projects across 386 unique firms in Ghana from June 2003 to September 2020. This includes information on jobs created and capital invested. Macroeconomic control variables (GDP, labor force participation rate, gross capital formation (GCF), inflation, tax burden, government integrity, business freedom, and property rights) from the World Bank and Statista are incorporated. The study employs OLS regression analysis, using four models to assess the relationship between Greenfield investment and job creation. Model 1 is a linear-linear bivariate regression. Model 2 is a log-log transformation to address non-linearity revealed in the initial model. Model 3 adds macroeconomic control variables to Model 2. Model 4 incorporates indexes measuring the rule of law (government integrity and property rights), regulatory efficiency (business freedom), and government size (tax burden) to provide a comprehensive analysis. A further model (Model 6) uses an interaction term to analyze the impact of GCF on job creation across various sectors. Robustness checks for multicollinearity (using VIFs) and heteroskedasticity (using Breusch-Pagan/Cook-Weisberg test and robust standard errors) are performed.

The analysis reveals a statistically significant and positive relationship between Greenfield investment and job creation in Ghana. Model 1 (linear-linear) shows that a $1 million increase in Greenfield investment leads to an expected 0.445 increase in jobs. Model 2 (log-log) indicates that a 1% increase in capital investment predicts a 0.719% increase in job creation. The inclusion of macroeconomic variables in Model 3 does not substantially alter the positive and significant impact of Greenfield investment, while also revealing the significant effects of GDP, GCF, LFPR, and inflation. Model 4's inclusion of governance indicators shows a continued positive and significant effect of capital investment. However, interestingly, government integrity and property rights have negative and significant correlations with job creation, suggesting potential challenges related to corruption and weak institutions. Business freedom exhibits a positive and significant effect on job creation. Sectoral analysis (Model 6) reveals that only 13 out of 31 sectors showed a positive and significant correlation with job creation when considering the impact of GCF. The sectors with the most significant positive impact include Automotive OEM, Business Machines & Equipment, Consumer Products, Food & Beverages, Metals, and Textiles.

The findings support previous research indicating a positive correlation between FDI and job creation in Ghana, but with important nuances. The significant effect of Greenfield investment on job creation highlights the importance of distinguishing it from Brownfield investment. The negative correlation between governance indicators and job creation highlights the challenges posed by corruption and weak institutions in attracting responsible investment and fostering employment. The positive effect of business freedom underscores the importance of creating a favorable business environment. The analysis also emphasizes the role of government investment in infrastructure (GCF), highlighting the importance of targeted investments in productive sectors. The differing effects across sectors highlight the importance of policy interventions focused on specific industries to maximize the job-creating potential of FDI.

This study demonstrates a positive and statistically significant relationship between Greenfield investment and job creation in Ghana, particularly within specific sectors. Efficient management of government investment in fixed assets is crucial to avoid inflation-related job losses. Chinese investments have significantly impacted Ghana's economy, yet transparency and sustainability concerns remain. Future research could explore the long-term impacts of different FDI sources, the effects of specific policy interventions, and the role of technological transfer in job creation.

The study relies on FDI Markets data which might not capture all investment projects. The cross-sectional nature of the FDI data limits the ability to assess causal relationships definitively. The reliance on macroeconomic control variables, which are measured annually, may mask more dynamic short-term relationships between FDI and employment.