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The Contribution of Foreign Direct Investment on Economic Growth in Rwanda

Philip Mwesiigye, Dr. Patrick Mulyungi

Abstract: The objective of this study was to examine the contribution of FDIs inflows for the selected sectors on economic growth in Rwanda and to ascertain the long run sustainability of the ones that contribute most on Rwandan Economy. This relationship was assessed using Johnson?s cointegration approach and vector error correction model for the annual data spanning the period of 2010-2015 obtained from National Institute of Statistics of Rwanda. Five alternative FDI inflows were used as independent variables. These are FDI inflows from construction sector as the ratio of real GDP (Cons_gdp), FDI inflows from manufacturing sector as the ratio of real GDP (Man_gdp), FDI inflows from mining sector as the ratio of real GDP (Min_gdp) , FDI inflows from financial and insurance sector as the ratio of real GDP( FinIn_gdp) , FDI inflows from utilities sector as the ratio of real GDP( Ut_gdp) while the economic growth was measured by real gross domestic product( RGDP). The results show that FDI inflows from construction and mining sectors have positive influence on economic growth in Rwanda economy in the both long run and short-run. This finding is consistent with theoretical literature because Rwanda is a developing country, so increases in foreign capital inflows positively especially in construction and mining sectors affect the level of investment; the consumption level is also increase because of foreign capital inflows. Furthermore, the value of R-square is 0.8 for long run and 0.85 for short run and those means the change in RGDP is explained by the change of selected variables. The study recommends therefore the government of Rwanda to reinforce the existing policies that will encourage FDI inflows in construction and Mining sectors as the major contributors of RGDP unlike other sectors. Also aggressive mechanisms should be adopted to pull more investors (FDI) in others sectors such Manufacturing, Utility, Finance and insurance sectors so that they can also bring positive and significance contribution to RGDP in Rwandan economy and there by accelerating Rwandan economic growth and development. Keyword: FDI inflows, Economic growth, Johnson? cointegration

Keywords: Economic growth is the increase in the goods and services produced by an economy, typically a nation, over a long period. It is measured as percentage increase in real gross domestic product (GDP) which is gross domestic product (GDP) adjusted for inflation. Economic growth: it defined as a positive change in the level of goods and services produced by a country over a certain period of time (Nitisha, 2015). Real gross domestic product (GDP) is the inflation-adjusted dollar value of all goods and services produced during a stated period. Only goods that are final products are counted, and they aren't necessarily counted when they are sold; they are counted when they are done being produced. FDI is regarded as the ownership or control of 10 percent or more of an enterprise's voting securities or the equivalent interest in an unincorporated business (Griffin & Pustay, 2010). Horizontal FDI (HFDI) is a type of investment which is in the same industry operating abroad as a firm operate, or offers the same services as it does at home, and tends to produce for local or original markets only without exporting much output to host country ( (Maskus, 2012); (Haile & Assefa, 2016). Vertical FDI is foreign direct investment by a firm to establish manufacturing facilities in multiple countries, each producing a different input to, or stage of, the firm's production process (Report, World Investement, 2018) Income is the money that an individual or business receives in exchange for providing a good or service or through investing capital. Capital is generally refers to financial wealth, especially that used to start or maintain a business. In classical economics, capital is one of the three factors of production. The others are land, and labor.

Country: Rwanda, Subject Area: Economics

Pages: 317 - 322

Edition: Volume 8 Issue 4, April 2019

How to Cite this Article?

Philip Mwesiigye, Dr. Patrick Mulyungi, "The Contribution of Foreign Direct Investment on Economic Growth in Rwanda", International Journal of Science and Research (IJSR), https://www.ijsr.net/archive/v8i4/show_abstract.php?id=ART20193025, Volume 8 Issue 4, April 2019, 317 - 322

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