The Contribution of Foreign Direct Investment on Economic Growth in Rwanda

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.