Assessing Tax Revenue and FDI on Economic Growth: Employing the Moderating Role of Institutional Quality in Ghana.

Abstract

Purpose: This study examines the short-run determinants of economic growth in Ghana, focusing on how institutional quality shapes the effects of Foreign Direct Investment (FDI) and domestic tax revenue on national output. It addresses a key gap in the literature concerning the uneven capacity of governance systems in emerging economies to attract external capital while effectively managing internal fiscal resources. Methodology: A quantitative time-series framework is applied to Ghana’s economy for the period 2000 to 2021. The conditional multiple regression model incorporates key interaction terms and is estimated using the Nonlinear Least Squares (NLS) method. To enhance efficiency and reliability, the model integrates an Autoregressive Moving Average (ARMA) process, which corrects for serial correlation commonly present in macroeconomic data, ensuring robust parameter estimation and valid inference. Findings: The results indicate a statistically sound model for explaining short-run growth dynamics. FDI exerts a strong, positive, and highly significant effect on economic growth, underscoring its established role in capital formation and technology diffusion. Institutional quality also has a significant positive impact, reaffirming that sound governance promotes stability and growth. In contrast, tax revenue displays an insignificant negative effect, suggesting administrative weaknesses or short-term policy neutrality. The interaction between institutional quality and taxation is likewise insignificant, implying that governance improvements have enhanced FDI attraction but have not sufficiently strengthened domestic tax mobilisation or its growth impact. Implications: The findings affirm FDI as a key growth driver while exposing a structural imbalance: Ghana’s institutional framework effectively supports external investment but remains less effective in leveraging domestic fiscal capacity. The policy takeaway is the need for stronger institutional alignment, particularly through governance reforms in fiscal administration, to enhance tax efficiency, broaden revenue bases, and sustain long-term economic growth.