4.

ANALYSIS AND EMPIRICAL RESULT

4.1 The Descriptive Statistics

Table 1 illustrates the descriptive statistics of the data on the determinants of FDI. The statistics
are sample means, medians, maximums, minimums, standard deviations, skewness, kurtosis, the
Jarque-Bera statistics and probabilities (p values) as well as sum, sum square deviations and 84
observations.

Table 1: Descriptive Statistics

LFDI
LCPI
LEXPORT LGDPC
LGPD
LIR
LPD
Mean
3.276737 2.463002
3.43272 1.441917 7.577257 2.65516 3.640632
Median
3.437208 2.351375
3.377308 1.440052 7.603551 2.52733 3.589059
Maximum
3.48124 3.032064
3.82541 1.516506 7.946465 3.15572 3.830813
Minimum
2.720923 2.127041
3.199693 1.371742 7.212243 2.36462 3.417727
Std. Dev.
0.277948 0.295985
0.248538 0.048675 0.213944 0.26798
0.15459
Skewness
-1.14397 0.707975
0.697883 0.082874 0.108147 0.72386 0.014601
Kurtosis
2.631168 2.015073
1.776626 1.746389 2.082782 1.92462
1.40731
Jarque-Bera
18.79742 10.41248
12.05683 5.596549
3.10825 11.3832 8.881298
Probability
0.000083* 0.005482*
0.002409* 0.060915 0.211374 0.00337* 0.011788*
Sum
275.2459 206.8922
288.3485 121.1211 636.4896 223.033 305.8131
Sum Sq. Dev.
6.412193 7.271377
5.127 0.196645 3.799073 5.96032 1.983535
Observations
84
84
84
84
84
84
84
Note: Asterisk (*) denotes the null of normality was rejected at 5% significance level.

From Table 1, all the variables exhibit a positive mean return. Also, the sum squared deviation
row represents the net change over the sample period. It shows that the Inflation rate, export of
goods and services, Gross Domestic Product per Capita, Gross Domestic Product and interest
rate and Public debt declined by about 7.27%, 5.13%, 0.19%, 3.799%, 5.96% and 1.98%
respectively. In terms of skewness, FDI stocks has return distribution that is negatively skewed
while the Inflation rate, export of goods and services, Gross Domestic Product, interest rate and
1

Public debt exhibit a positive skewness which implies that it has a fat right tail. Kurtosis value
of LFDI, LCPI, LEXPORT, LIR and LPD depicts that data are not normally distributed because
values of kurtosis are deviated from 3. The Jarque-Bera statistics and corresponding p-values are
used to check for the normality assumption. On the basis of Jarque-Bera statistics and p-values,
the normality assumption is rejected at 5 percent level of significance for LFDI, LCPI,
LEXPORT, LPD, LFDI, LEXPORT and LIR variables. The only variables that do not reflect this
are LGDPC and LGDP.

4.2 Graph of logarithms of Variables under consideration

The log graph in figure 1 shows the kind of behaviour and the relationships that exist between
the variables over the sampled period.
Figure 1: logarithms of Variables under consideration
28
24
20
16
12
8
4
0
2006

2007

2008
LFDI
LGDPC
LPD

2009
LCPI
LGPD

2010

2011

2012

LEXPORT
LIR

4.3 Correlation Variables

Table 2 shows the correlation among the variables under study. The LFDI has a negative
relationship with LCPI, LGDPC, LIR and positive relationship with LEXPORT and LGDP. It

implies that whenever LCPI, LGDPC and LIR goes up FDI comes down and vice versa.
Similarly, when LEXPORT and LGDP go up FDI also goes up. The GDPC is highly negatively
correlated with LEXPORT and LPD and therefore was dropped to avoid multicollinerity problem
in our subsequent analysis.

Table 2: Correlation of Variables

LFDI

LCPI

LEXPORT

LGDPC

LGPD

LIR

LPD

LFDI

1.00000

-0.23191

0.59954

-0.51112

0.42079

-0.22134

0.48068

LCPI

-0.23191

1.00000

-0.50348

0.31726

-0.38108

0.99641

-0.43840

LEXPORT

0.59954

-0.50348

1.00000

-0.89584

0.64881

-0.48225

0.78286

LGDPC

-0.51112

0.31726

-0.89584

1.00000

-0.62815

0.28071

-0.93130

LGPD

0.42079

-0.38108

0.64881

-0.62815

1.00000

-0.36599

0.55854

LIR

-0.22134

0.99641

-0.48225

0.28071

-0.36599

1.00000

-0.40953

LPD

0.48068

-0.43840

0.78286

-0.93130

0.55854

-0.40953

1.00000

4.4 Augmented Dickey-Fuller (ADF) Unit Root Test

Under the unit root test in Table 3, all the variables were not stationary at levels but, with the
exception of LGDPC, became stationary at first difference. The LGDPC therefore was dropped
in the cointegration analysis and VECM model.
Table 3: Augmented Dickey-Fuller (ADF) Unit Root Test
Variables
Levels (Trend & Intercept)
First Difference (Trend & Intercept)
Sig.level
Sig.level(%) t-statistics Prob.*
(%)
t-statistic Prob.*
ADF test
statistics
-1.58489
0.4858
-8.95297
0.0000
1
-3.51126
1
-4.07386
LFDI
5
-2.89678
5
-3.46555
10
-2.58563
10
-3.15937

ADF test
statistics
LCPI
ADF test
statistics
LEXPORT

ADF test
statistics
LGDPC

ADF test
statistics
LGDP
ADF test
statistics
LIR

1
5
10

-1.74642
-4.07386
-3.46555
-3.15937

0.7214

1
5
10

-2.44496
-4.07242
-3.46487
-3.15897

0.3543

1
5
10

0.887485
-4.09255
-3.47436
-3.1645

0.9998

1
5
10

-2.10094
-4.08688
-3.47169
-3.16295

0.5366

1
5
10

-1.7757
-4.07386
-3.46555
-3.15937

0.7076

ADF test
statistics

-2.70721
1
-4.07242
LPD
5
-3.46487
10
-3.15897
*MacKinnon (1996) one-sided p-values.
4.5

-5.40857
-4.07386
-3.46555
-3.15937

0.0001

1
5
10

-9.73476
-4.07386
-3.46555
-3.15937

0.0000

1
5
10

0.3221

1
5
10

-1.43581
-4.09255
-3.47436
-3.1645

-13.0415
-4.08688
-3.47169
-3.16295

0.0001

1
5
10

-5.17127
-4.07386
-3.46555
-3.15937

0.0003

1
5
10

0.0000

1
5
10

-10.2742
-4.07386
-3.46555
-3.15937

0.2366

Lag selection criteria

Before estimating the model and determining the rank (r) to find the number of cointegrating
relations in the model, the optimal lag length was determined using 8 maximum lags in the
general VAR model. The aim is to choose the number of parameters, which minimize the value
4

of the information criteria. To make sure that there is no remaining autocorrelation in the VAR
model, the efficient lag is selected. The model lag length established in Table 4 indicates the
appropriate lag length of 8 for FPE, AIC and HQ. Having established the lag length, the presence
of long-run relationship among the variables were tested using Johansen's cointegration test
method. An intercept and trend was specified for the cointegration test.
Table 4: Lag Selection Creteria
Lag
LogL
LR
FPE
AIC
1 1101.074
NA
2.24E-21
-27.686160
2 1137.129
58.82723
3.23E-21
-27.345510
3 1157.609
29.64161
7.37E-21
-26.594970
4 1185.021
34.62518
1.51E-20
-26.026860
5 1216.376
33.83025
3.15E-20
-25.562510
6 1368.999
136.5575
3.23E-21
-28.289440
7 1546.662
126.345*
2.26E-22
-31.675310
8 1625.239
41.35642
3.4E-22*
-32.45366*
* Indicates lag order selected by the criterion
LR: sequential modified LR test statistic (each test at 5% level)
FPE: Final prediction error
AIC: Akaike information criterion
SC: Schwarz information criterion
HQ: Hannan-Quinn information criterion

SC
-26.18345*
-24.340090
-22.086850
-20.016020
-18.048970
-19.273180
-21.156350
-20.431980

HQ
-27.085600
-26.144400
-24.793310
-23.624640
-22.559740
-24.686100
-27.471430
-27.64922*

4.6 Unrestricted Cointegration Rank Test (Trace) and Maximum Eigenvalue

Both trace statistic and maximum eigenvalue statistic indicate one cointegrating vector at the 5%
significance level (Tables 5a and 5b). Given evidence in favour of at least one cointegration
relation, the null hypothesis of no cointegration is rejected. This indicates long run relationship
between FDI, Export, Inflation, Interest rate, Public debt, and GDP variables in a long-run
equilibrium path.
Table 5a: Unrestricted Cointegration Rank Test (Trace)
5

Hypothesized

Trace

0.05
Critical
Value

No. of CE(s)

Eigenvalue

Statistic

Prob.**

None *

0.504315

114.8652

95.75366

0.0013

At most 1

0.249035

59.42185

69.81889

0.2535

At most 2

0.199743

36.7965

47.85613

0.3572

At most 3

0.122174

19.19353

29.79707

0.4791

At most 4

0.096091

8.899307

15.49471

0.3748

At most 5

0.011556

0.918251

3.841466

0.3379

Trace test indicates 1 cointegrating eqn(s) at the 0.05 level

* Denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Table 5b: Unrestricted Cointegration Rank Test (Maximum Eigenvalue)

Hypothesized

Max-Eigen

0.05

No. of CE(s)

Eigenvalue

Statistic

Critical Value

Prob.**

None *

0.504315

55.44331

40.07757

0.0005

At most 1

0.249035

22.62535

33.87687

0.5592

At most 2

0.199743

17.60297

27.58434

0.5285

At most 3

0.122174

10.29422

21.13162

0.7166

At most 4

0.096091

7.981057

14.2646

0.3806

At most 5

0.011556

0.918251

3.841466

0.3379

Max-eigenvalue test indicates 1 cointegrating eqn(s) at the 0.05 level

* Denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
4.7 A Plot of Cointegration Vector normalised on DLFDI
The cointegration graph presented in Figure 2 below confirms that there are more than one mean
reversion effect in the cointegration vector over the period under study. This signifies a good
error correction behaviour in the cointegration system. Given the evidence in favour of at least

one cointegrating vector, we proceeded to estimate the VECM to examine the short-run causal
associations between the variables. The result of the VECM estimation is shown in Table 6a.
1.2
0.8
0.4
0.0
-0.4
-0.8
-1.2
2006

2007

2008

2009

2010

2011

2012

Cointegrating relation 1

Figure 2: A Plot of Cointegration Vector normalised on DLFDI

4.8 Vector Error Correction Model (VECM)

Table 6a shows the VECM for LFDI with significant error correction term in the FDI equation.
The sign and magnitude of the error correction coefficient indicates the direction and speed of
adjustment towards the long-run equilibrium path. It should be negative and significant, which is
the case here. The negative sign implies that, in the absence of variation in the independent
variables, the models deviation from the long run relation is corrected by increase in the
dependant variable. Highly significant error correction term is an evidence of the presence of a
stable long-term relationship (Bannerjee et al, 1998). The estimated coefficient of the ECM (1)
is -0.03033 (p-value = 0.0000) suggesting that, in the absence of changes in other variables,
deviation of the model from the long-term path is balanced by 3 per cent increase in FDI per
month. This means that in a year the variation is corrected at the speed of 36% per year. The
fundamental regression statistics show that R2 (88.658%) is high implying that overall goodness
of fit of the VECM model is adequate. The Durbin Watson Statistic (1.715778) shows that there
is no autocorrelation in the residuals. The F-statistic of 3.9884470 with it corresponding

p-

value [0.00198] suggests that LCPI, LEXPORT, LIR, LGDP and LPD jointly impact on FDI.
7

This means that all the variables under study influence FDI in the long run. The Lag variables 1,
2 and 5 8 of LFDI independently influence the FDI in a negative way. Lag variables 2 8 of
LCPI, 1 8 of LGDP both independently influence FDI in a positive way, while 1 5 of
LEXPORT, 2 7 of LIR, and 1 3 of LPD independently influence LFDI in a negative way in a
short run. This implies that as both LCPI and LGDP increase, FDI stock also increases in Ghana
in the short run. Similarly, as LEXPORT, LIR and LPD increase, LFDI reduces.

Table 6a: VECM estimation for LFDI

Variables
Coefficient
Std. Error
t-Statistic
Prob.
LFDIt-1
-0.75020
0.16499
-4.54689
0.0001**
LFDIt-2
-0.45603
0.13966
-3.26535
0.0032**
LFDIt-3
0.08764
0.09706
0.90290
0.375200
LFDIt-4
0.16043
0.12600
1.27328
0.214600
LFDIt-5
-0.02983
0.13697
-0.21779
0.829400
LFDIt-6
-0.93313
0.14744
-6.32883
0.0000**
LFDIt-7
-0.94019
0.17883
-5.25761
0.0000**
LFDIt-8
-0.79870
0.17031
-4.68982
0.0001**
LCPIt-1
1.10678
0.65492
1.68995
0.103500
LCPIt-2
2.63996
0.66800
3.95202
0.0006**
LCPIt-3
3.34864
0.61722
5.42541
0.0000**
LCPIt-4
2.55266
0.65013
3.92639
0.0006**
LCPIt-5
3.45662
0.65952
5.24109
0.0000**
LCPIt-6
3.14003
0.70916
4.42779
0.0002**
LCPIt-7
3.42929
0.76933
4.45748
0.0002**
LCPIt-8
2.34587
0.68537
3.42279
0.0021**
LEXPORTt-1
-1.11555
0.25846
-4.31609
0.0002**
LEXPORTt-2
-1.36643
0.23803
-5.74047
0.0000**
LEXPORTt-3
-0.86399
0.20854
-4.14303
0.0003**
LEXPORTt-4
-0.75049
0.23140
-3.24329
0.0033**
LEXPORTt-5
-0.76790
0.20976
-3.66092
0.0012**
LEXPORTt-6
-0.15189
0.21261
-0.71439
0.481600
LEXPORTt-7
-0.08168
0.19454
-0.41983
0.678200
LEXPORTt-8
-0.29483
0.18753
-1.57220
0.128500
LGDPt-1
3.50093
0.41242
8.48887
0.0000**
8

LGDPt-2
3.02331
0.40085
7.54231
LGDPt-3
1.70792
0.28129
6.07177
LGDPt-4
1.78727
0.22946
7.78920
LGDPt-5
1.66176
0.23940
6.94137
LGDPt-6
1.78543
0.25919
6.88850
LGDPt-7
2.04294
0.30805
6.63195
LGDPt-8
1.43980
0.26535
5.42616
LIRt-1
-1.61443
0.80517
-2.00507
LIRt-2
-1.72503
0.75903
-2.27266
LIRt-3
-2.88179
0.70996
-4.05908
LIRt-4
-2.31056
0.81527
-2.83409
LIRt-5
-2.87497
0.84126
-3.41745
LIRt-6
-3.74440
0.80291
-4.66355
LIRt-7
-3.03715
0.96789
-3.13792
LIRt-8
-1.52011
0.76302
-1.99222
LPDt-1
-1.35925
0.37374
-3.63688
LPDt-2
-1.17775
0.36455
-3.23068
LPDt-3
-0.69264
0.30813
-2.24790
LPDt-4
-0.64544
0.34073
-1.89432
LPDt-5
-0.32876
0.35976
-0.91383
LPDt-6
-0.00299
0.37532
-0.00797
LPDt-7
0.67190
0.35650
1.88473
LPDt-8
0.19844
0.34582
0.57381
C
-0.04749
0.02305
-2.06056
ECM(-1)
-0.03033
0.00338
-8.98435
R-squared
0.8865870
Mean dependent var
Adjusted R-squared
0.6642980
S.D. dependent var
S.E. of regression
0.0596990
Akaike info criterion
Sum squared resid
0.0891000
Schwarz criterion
Log likelihood
146.16030
Hannan-Quinn criter.
F-statistic
3.9884470
Durbin-Watson stat
Prob(F-statistic)
0.00198**
Note: Prob. Values with ** are significant at the 5% significant level

0.0000**
0.0000**
0.0000**
0.0000**
0.0000**
0.0000**
0.0000**
0.055900
0.0319**
0.0004**
0.0009**
0.0022**
0.0001**
0.0043**
0.057400
0.0013**
0.0034**
0.0336**
0.069800
0.369500
0.993700
0.071100
0.571200
0.0499**
0.0000**
0.000332
0.103037
-2.564274
-1.019282
-1.947375
1.715778

4.9 VECM model Diagnostic test

The first step in econometric analysis is to analyse the time series properties of the data by
testing whether the variables are stationary or not. For this purpose, we apply ADF, Serial
Correlation, Heteroskedasticity and Normality test to the series. The results of these tests are
9

given in Tables 5a, 5b and 6b. In accordance with these results, the levels of all series do not
include unit root at 1 percent significance level. This means that levels of these series are
stationary.
Table 6b: VECM Model Diagnostic Tests
Serial Correlation
F(8,17)=0.718903[0.6730]
Heteroskedasticity
F(54,20)=1.351899[0.2320]
Normality
X2 (2)=25.76546[0.0003]
The diagnostic test statistics reported in Table 6b indicates that the model passes serial
correlation and heteroscedasticity test at the 5% but fail normalilty test.

4.10 Plots of CUSUM Recursive Residuals

The cumulative sum (CUSUM) plots in Figure 3 from a recursive estimation of the model
indicate stability in the dependent variable over the sample period.
15
10

5
0
-5
-10

-15
IV
2010

II

III
2011

IV

II

III

IV

2012
CUSUM

5% Significance

Figure 3: Plots of CUSUM Recursive Residuals

4.11: Actual, Fitted and Residual Plots of the Foreign Direct Investment (FDI)
The actual, fitted, and residual plots in Figure 4 show that the model has a relatively good fit, as
the residual are stationary around zero (that is, mean reverting).
10

.4
.2
.0
.15

-.2

.10

-.4

.05

-.6

.00

-.8

-.05
-.10
-.15
2006

2007

2008

2009
Residual

2010
Actual

2011

2012

Fitted

Figure 4: Actual, Fitted and Residual Plots of the Foreign Direct Investment (FDI)

11