SME Market Entry and Impact of AfCFTA on FDI in Ghana

Authored By:

Hassan I C Jagne

,

November 11, 2022

The Africa Continental Free Trade Area (AfCFTA) agreement is set to create the largest free trade area in the world with 55 countries, 1.3 billion people, and a GDP of US$3.4 trillion. The AfCFTA intends to lift over 30 million Africans out of poverty and increase the wages of nearly 68 million Africans who are currently earning less than $5.50 a day (according to the World Bank and the African Development Bank). Foreign Direct Investment (FDI) has been one of the main drivers of growth in some developing countries across the world. FDI is recorded to be among the largest inflow of investment into developing countries. In most cases, the benefits of FDI include job creation, wage increases, the kickstarting of new industries, and technological and productivity spillovers. In recent years, the attraction of FDI has become one of the key policy focuses of most developing countries. For instance, evidence shows that in 2018, Ghana grew to become the largest recipient of FDI in West Africa overtaking Nigeria with $3.2bn. Despite the COVID-19 pandemic, Ghana has maintained FDI inflows that defy the predicted downturn by the World Bank. Ghana is an attractive destination for FDI due to its political stability, sound economic policies, reliable energy supplies, and transportation linkages across the continent. In order to investigate the barriers, challenges, and opportunities for international SMEs to gain entry into the Ghanaian market via FDI, interviews were conducted with 13 policy makers, business managers, and entrepreneurs in Ghana. The findings show that the current barriers to entry into the Ghanaian market are the minimum capital requirements, the cumbersome registration processes, and the issue of corruption. Furthermore, access to financing, the costs of production, and access to information are some of the crucial challenges encountered in the process. The described opportunities derived from the interview data are the abundance of labour, the government promotion of manufacturing, and the ratification and domestication of the AfCFTA which grants access to a wider market and cheaper raw materials from the resource rich African continent.

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