Foreign direct investment (FDI) and SMEs growth in Host Country: Evidence from Rwanda

Abstract

Foreign Direct Investment (FDI) can spur the growth of different economic sectors by creating opportunities for host country to benefit from knowledge, technology and management practices brought by foreign investors. This study aims at assessing how Foreign Direct Investment influences the growth of Rwanda’s SMEs. To attain this objective, the researcher has explored secondary data collected through financial statements of selected SMEs drawn from the establishment census report. This study has used secondary data collected from different sources, which were analysed using the Statistical Package for Social Sciences (SPSS) software. The researcher first computed the average financial ratios from SMEs financial statements, performed a descriptive analysis to understand different levels of variables. Furthermore, a correlation analysis using Pearson correlation coefficient with two-tailed test was conducted to understand the relationship between dependent and independent variables. A regression analysis was also used to analyse the effect that foreign direct investment (FDI) indicators have on individual SMEs growth indicators. Findings of the study revealed that FDI expressed as percentage of GDP affects positively the SMEs growth through the indicators of net profit margin, annual turnover growth and return on equity. However, there is a negative relationship between FDI expressed as percentage of GDP and the solvency of SMEs. In this regard, the study concluded that there is correlation between the FDI and SMEs growth in Rwanda. Considering other variables, there is a mixed correlation between the variables of FDI and the indicators of SMEs growth. To maintain and sustain the positive effect of FDI, it is recommended that the government of Rwanda should enhance measures to boost macroeconomic stability and positive achievements made so far. It is also recommended that promoting joint ventures between foreign and domestic SMEs would enhance technology and skills transfer so as to strengthen the impact of FDI on domestic SMEs.