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International Journal of Research and Innovation in Social Science (IJRISS) |Volume VI, Issue XII, December 2022|ISSN 2454-6186

The Impact of Capital Budgeting on Economic Growth in Ghana

 Frederick Forkuo Yeboah
School of Business, Valley View University, Ghana

IJRISS Call for paper

Abstract: The aim of this study is to examine the effect of capital budgeting on economic growth as well as the causal relationship between capital budgeting and economic growth in Ghana. The study employed secondary data from the World Development Indicators (WDI) and Ministry of Finance, Ghana, annual data spanning from 1990 to 2021 which was estimated with Autoregressive Distributive Lag (ARDL) cointegration technique. The findings revealed that there was statistically significant long run relationship between capital budgeting and economic growth from the bounds test. Again, capital budgeting significantly relates negatively to economic growth in both long and short run in Ghana. the study found out that Ghana’s capital expenditure is mostly spent on unproductive ventures. There were no causal relations between capital budgeting and economic growth in Ghana. The study recommends that government and policy makers should urgently direct capital budget to productive capital ventures with good returns and short payback period.

Keywords: Capital Budgeting, Economic Growth, Efficiency, Fund Utilization, Policy Maker.

I. INTRODUCTION

Economic growth, according to Heimberger (2021) [15], indicates a steady increase in national revenue or output over a lengthy period of time. This implies that economic growth is a long term rise in the flow of commodities and services in an economy. Economic growth means a long-term increase in output or income. According to Abotsi and Iyavarakul (2015) [1], a rise in an economy’s output of goods and services in a given year constitutes economic growth. Osiobe (2019) [27] asserted that economic growth is linked to the development of both physical and human capital as well as the enhanced productivity resulting from technological advancement.
Adzisu (2018) [4] explained that capital budgeting, posited that it is the process of planning, evaluating and selecting the best investment from the possible range of capital investment to achieve a stated objective. The selection of a particular capital investment is based on the most efficient use of funds in anticipation of expected flow of benefit over a period of time. Capital budgeting decision according to Al-Mutairi et al., (2018) [7] is seen as important decision in corporate finance because it creates accountability and measurability. Accountability in the sense that its owners or shareholders would see any firm seeking to make a capital investment without evaluating the risks and potential rewards as beingirresponsible. Furthermore, if a business is unable to evaluate the success of the capital investment decisions it