The impact of foreign direct investment on economic growth of rwanda

Abstract

This study intended to assess the impact of Foreign Direct Investment on the economic growth of Rwanda. In order to achieve this objective, the study used multivariate time series analysis on the relationship that exists between FDI and GDP controlled by other macroeconomic variables such as, BOT, inflation and exchange rate. The study adopted vector error correction model analysis from 2006 and 2018. The results obtained in this research suggest that increase in FDI has been associated with positive economic growth in Rwanda. FDI was linked with increases in the exchange rate and a negative trade balance. The study involved numerous diagnostic tests and the results showed that the model was well specified with one omitted variable (Ramsey RESET test) at 10% with 0.1190 probability value and R squared 0.1336. The results test on BG-LM test suggests that the variables were not seriously affected by collinearity, heteroskedasticity and serial correlation problem. This study has found out that, previous period FDI, country’s real GDP and previous period exchange rate determined increase in country’s economic growth of which stability in GDP performance is an important factor. This study used monthly and annual data transformed in quarterly data which have improved the results. The study recommends future researchers to consider micro panel data for selected firms, using the same analysis.