Optimizing foreign direct investment for sustainable trade balance improvement: the case of a developing economy

The primary aim of this research is to determine the optimal level of FDI that maximises trade balance from the perspective of a developing economy, Ghana. The study utilized annual time-series data from 1980 to 2022, obtained from the World Bank, International Monetary Fund and the Bank of Ghana. To investigate the relationship between FDI and trade balance, the study employed Auto Regressive Distributed Lag (ARDL) models, Error Correction Models, and Smooth Threshold regression techniques. The findings indicate that FDI has a positive and significant influence on Ghana’s trade balance in both the short and long run. The study also identified an FDI threshold value of 6.6069% at which the favourable trade effects of FDI is optimized. Additionally, the study established a unidirectional causality from FDI to trade balance. It recommends that policymakers in Ghana should develop an FDI threshold monitoring system to ensure that FDI inflows, as a percentage of Gross Domestic Product is kept within the threshold value of 6.6069%. Furthermore, it advises promoting investment diversification to reduce dependency risks, improving the investment environment and regulatory framework, strengthening export promotion strategies especially on agricultural produce, and investing in workforce skills and technology transfer across key sectors to achieve a favourable and sustainable trade balance.