ANALYSIS OF THE IMPACT OF FOREIGN DIRECT INVESTMENT NET INFLOWS ON ECONOMIC GROWTH USING ERROR CORRECTION MODEL (ECM): Empirical Study from Rwanda (1991-2022)

Abstract

The purpose of this study was to explore the impact of Foreign Direct Investment (FDI) Net Inflows on economic growth in Rwanda. In this study secondary data were used and they cover the time period from 1991-2022. This study attempted to determine empirical impact of FDI on Rwandan economy using macroeconomic annual time series data of gross domestic product as dependent variable and foreign direct investment, gross capital formulation and exports which are considered as the endogenous variables. This study used the Error Correction Model (ECM) to analyse both short-run and long-run impact of foreign direct investment (FDI) on Rwanda's economic growth from 1991 to 2022 and the research used the Johansen Cointegration test to analyse the long-run relationship. The study aimed to ascertain if inflows of foreign direct investment impact positively or negatively, the real GDP growth in the long run. The study revealed a statistically insignificant and negative association between real GDP growth and FDI inflow in long-run and insignificant and positive relationship between real GDP and FDI net inflow in short-run. Furthermore, the study revealed a positive and significant relationship between gross capital formation (GCF), exports and the real GDP.