Foreign Direct Investment and Economic growth in Rwanda (2010 - 2017)

Abstract

This study aimed at examining the impact of Foreign Direct Investment on economic growth in Rwanda using quaterlised time series data for the period 2000-2017. Employing a time series analysis, the study used the Johansen methodology to infer if there is a cointegrating relationship between economic growth, foreign direct investment and other regressors. The results pointed to one cointegrating relationship linking economic growth in Rwanda to capital formulation, labor, Foreign Direct Investment, trade openness and inflation hence the existence of a long run relationship between them. The long run model indicated that economic growth is negatively linked to Foreign Direct Investment although insignificantly. However, it was positively linked to capital formulation, labor, and trade openness. The direction of impact of capital and labor are in resonance with the Solow growth model. Also, economic growth was found to be negatively related to inflation. The short-run dynamics of economic growth were subsequently modeled by means of an Error correction model. A number of diagnostic tests performed on the ECM yield reasonable results. All of this indicates that economic growth in Rwanda can be rationally explained by the model adopted. The main policy implication of these results is that the Rwandan government should come up with policies which will create an enabling environment for attractive and viable FDI inflows into the country. Also, policy makers should review existing policies to control multinational company operations, minimize excessive profit repatriation and divestments together with encouraging expansive strategies.