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Savings in Ghana like most developing countries is very low. This poses problems to investment spending and accelerated economic growth due to lack of capital formation. The trend has been to use foreign capital as the source of development. This work tries to examine the contribution that foreign capital has had on the Ghanaian economy. Precisely, the work examines the effect of foreign capital on domestic savings. More precisely, it examines the effect of foreign direct investment, foreign aids and grants and foreign commercial borrowing on domestic savings. The study uses the co-integration technique for the estimation of the long-run and the Error Correction Model (ECM) to estimate the short-run dynamic savings model in Ghana. The outcome of the study shows that there is a positive and significant effect of foreign capital on real domestic savings in Ghana in the long run, though not steady but volatile. The short-run dynamic model revealed that foreign capital has no significant effect on real domestic savings in Ghana in the short-run. The three components of foreign capital do not therefore displace domestic savings both in the short-run and the long-run. The policy implications are that, Ghana must rely more on foreign direct investment by improving on the locational advantages. Again, the capital market must be strengthened to provide an avenue for investing the profits of firms to prevent capital flight.

Does Foreign Capital Crowd–Out Domestic Saving in Developing Countries? An Empirical Investigation of Ghana