GIKONDO CAMPUS

COLLEGE OF BUSSINESS AND ECONOMICS

SCHOOL OF ECONOMICS
DEPARTMENT OF APPLIED STATISTICS
OPTION OF ACTUARIAL SCIENCE
ACADEMIC YEAR 2022-2023

EFFECTS OF FOREIGN DIRECT INVESTMENT ON ECONOMIC

GROWTH IN RWANDA
PERIOD 1990-2022

A dissertation submitted to the University of Rwanda, College of Business and Economics in

partial fulfillment of requirement of an award of bachelor’s degree in Applied Statistics

Authors
Names Registration number
1. MUSONI James 221014654
2. RUKUNDO Frank 221019200
3. KANSHOZI KIRABO Sheba 221019210
4. NGABONZIZA Dan 221016127

Supervisor: Mr MWERULI Fidele Done on 8th July 2024

 DEDICATION

We dedicate this dissertation to

Almighty God
Parents
Siblings
Classmates
Supervisor

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 DECLARATION

We are hereby declare that this dissertation entitled to assess the EFFECTS OF FOREIGN
DIRECT INVESTMENT ON ECONOMIC GROWTH IN RWANDA is our own work and it
has not been submitted anywhere for the award of any degree.

Student Signature …………………….. Date ………/…………/…………..

Name of student: MUSONI James

Student Signature …………………….. Date ………/…………/…………..

Name of student: RUKUNDO Frank

Student Signature …………………….. Date ………/…………/…………..

Name of student: KANSHOZI KIRABO Sheba

Student Signature …………………….. Date ………/…………/…………..

Name of student: NGABONZIZA Dan

Supervisor signature: …………………………… Date: 8/July/2024

Name of supervisor: Mr MWERULI FIDELE

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 ACKNOWLEDGEMENT

We have taken this endeavor in this dissertation. We would like to thank everyone who
participated in everything that is being presented in our research. We are highly indebted to
University of Rwanda and our supervisor Mr. MWERULI Fidele, our dissertation would not be
suitable as it is without working under his supervision, and we thank UR and their supervisors
for their concern to student’s development in pursuing their careers with equipment of
knowledge and skills in field of research and other academic needs. We are grateful to almighty
God for protection and our health. We are so thankful to our parents, brothers, sisters, relatives
and colleagues.
Thank you!

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 ABSTRACT

The study titled ‘’’The study Effects of Foreign Direct Investment on economic growth in
Rwanda’’ was about assessing the impacts of foreign direct investment on economic growth of
Rwanda’’. The study was guided with three objectives; firstly, examine how foreign direct
investment and its variables affects economic growth. Secondly, Estimate future GDP growth by
using the selected independent variable’s values. Lastly, Determine which variables are most
statistically significant in affecting GDP growth. The target population was countries or regions
from the sample of wider range of countries seeking to attract FDI. This study used quantitative
approach in data collection, Multiple-regression techniques and EVIEWS 7 econometrics
software were employed to measure the relationship between foreign direct investment (FDI) and
economic growth (GDP). Augmented Dickey-Fuller (ADF) and co-integration tests for
stationarity time series were employed. The findings revealed that the first objective; the results
showed the positive effects of foreign direct investment and their variables on economic growth
but not statistically significant influence. Secondly, the estimate of the future GDP growth,
represents the predicted future growth GDP, which is 2.03% based on the future example
variable values and the given equation. Thirdly, the results show the most statistically significant
variables Therefore the study concludes that the foreign direct investment has positive impacts
but not statistically significant on economic growth of Rwanda and is opposed to some study that
has a negative effects of foreign direct investment on economic growth of any host country. It
was recommended to the government to government to focus on the infrastructure development
that will attract the more foreign direct investment in the country. Government should suggests
policies that will maximize the benefits from FDI inflows. If not multinational corporations may
benefit nation because there is high rate of profit return. Despite its shortcomings, the model
provides insightful information. Understanding the variables influencing GDP growth and
developing successful FDI attraction tactics require ongoing research.

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 LIST OF ABREVIATIONS

FDI: Foreign Direct Investment

GDP: Gross Domestic Product
PPP: Purchasing Power Parity
UNCTD: United Nations Conferences on Trade and Development
RDB: Rwanda Development Board
USD: Unites State Dollar
MNCs: Multinational Corporations
NISR: National Institute of Statistics Rwanda
CPI: Consumer Price Index
BNR: National Bank of Rwanda
ADF: Augmented Dickey-Fuller
NGOs: Non-Government Organization
IMF: International Monetary Fund

Table of Contents
5
DEDICATION...........................................................................................................................................1
DECLARATION.......................................................................................................................................2
ACKNOWLEDGEMENT........................................................................................................................3
ABSTRACT...............................................................................................................................................4
LIST OF ABREVIATIONS......................................................................................................................5
LIST OF TABLES.....................................................................................................................................8
CHAPTER 1 GENERAL INTRODUCTION........................................................................................16
1.0 INTRODUCTION.........................................................................................................................16
1.1 BACKGROUND OF THE STUDY..............................................................................................16
1.3 PURPOSE OF THE STUDY.........................................................................................................18
1.3.2 SPECIFIC OBJECTIVES..........................................................................................................18
1.4 RESEARCH QUESTIONS...........................................................................................................18
1.5 RESEARCH HYPOTHESIS........................................................................................................18
1.6 SIGNIFICANCE OF THE STUDY..............................................................................................19
1.7 SCOPE OF THE STUDY..............................................................................................................19
1.8 LIMITATIONS OF THE STUDY................................................................................................19
2.0 INTRODUCTION.........................................................................................................................19
2.1 DEFINITION OF KEY TERMS..................................................................................................20
2.1.1 Economic Growth...................................................................................................................20
2.1.2 Inflation...................................................................................................................................20
2.1.3 Effectiveness............................................................................................................................20
2.1.4 Foreign Direct Investment......................................................................................................21
2.2 IMPACTS OF FDI ON ECONOMIC GROWTH OF RWANDA..................................................21
2.4 MOST STATISTICALLY SIGNIFICANT VARIABLE AFFECTING GDP GROWTH.........22
2.5.1 ECONOMIC GROWTH THEORIES..................................................................................23
2.5.2 EMPIRICAL LITERATURE................................................................................................23
2.6 CONCEPTUAL FRAMEWORK.................................................................................................24
2.7RESEARCH GAP...........................................................................................................................25
CHAPTER 3: RESEARCH METHODOLOGY...................................................................................26
3.1: Introduction..................................................................................................................................26
3.2 RESEARCH APPROACH AND RESEARCH DESIGN............................................................26
3.3 TARGET POPULATION..............................................................................................................26
3.4 DATA SOURCE.............................................................................................................................26

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 3.4.1 SECONDARY DATA..............................................................................................................26
3.5 DATA COLLECTION...................................................................................................................27
3.6 DATA ANALYSIS..........................................................................................................................27
3.6.1 METHODS OF DATA ANALYSIS.................................................................................27
3.7 MULTIPLE REGRESSION MODEL..........................................................................................28
3.8 DATA SUMMARY AND PRESENTATION................................................................................29
CHAPTER 4 FINDINGS, RESULTS AND DICUSSION.....................................................................29
4.1 INTRODUCTION.........................................................................................................................30
4.2 DESCRIPTIVE OF REGRESSION MODEL.............................................................................30
4.2.1 UNIT ROOT TEST.................................................................................................................30
CHAPTER 5 SUMMARY, CONCLUSION AND RECOMMANDATION 5.1 INTRODUCTION. .42
5.2 SUMMARY OF FINDINGS..........................................................................................................42
5.4 RECOMMANDATIONS...............................................................................................................42

LIST OF TABLES

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Table 1: TESTING STATIONARITY OF CPI (INFL)…………………………………..27
Table2: TESTING STATIONARITY OF GDP……………………………………………...28
Table 3: TESTING STATIONARITY OF FDI………………………………………………30
Table 4: TESTING STATIONARITY OF GOVERNMENT EXPENDITURE…………….31
Table 5: TESTING STATIONARITY OF LABOR FORCE…………………………..32
Table 6: TESTING STATIONARITY OF TRADE OPENS……………………………33
Table 7: TESTING FOR CO-INTEGRATION……………………………………….34
Table 8: ESTIMATION OF LONG-RUN REGRESSION MODEL………………………35

Table 9: 9 ERROR COLLECTION MECHANISM (ECM) AND SHORT RUN

RELATIONSHIP……………………………………………………………………..36

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CHAPTER 1 GENERAL INTRODUCTION
1.0 INTRODUCTION

This chapter aims at providing the background, the statement of the problem, the general and
specific objectives, and hypothesis, the scope, and the significant of the study and organization of
the study.

1.1 BACKGROUND OF THE STUDY

Foreign Direct Investment (FDI) has emerged as a critical driver of economic growth and
development for many countries around the world. Multiple studies ( (Siddique et al., 2017) ;
(Kebede & Martin, n.d.) ; (Adeniyi, 2023); (Mwesiigye & Mulyungi, n.d.) provide plenty proof
of this favorable relationship. However, the effectiveness of FDI in encouraging economic
growth can vary significantly based on nation’s economic policies and focused sectors for
investment. According to the United Nations Conferences on Trade and Development (UNCTD)
World investment reports 2023, the global FDI inflows reached $10.7 trillion in 2022. The
Continental of Africa received $83 billion in FDI inflows in 2021. This number reflects a record
high, but has since declined slightly. Despite the decline, Africa still accounted for 5.2% of
global FDI inflows in 2021. The Sub-Saharan regional FDI inflows the data from World Bank
shows that net FDI inflows to Sub-Saharan region reached $45 billion in 2022. In the comparison
to the peak of 80 billion in 2021 this indicate a decrease. FDI inflows are projected to fall in
2022 due to a number of factors such as the ongoing COVID-19 pandemic and the world-wide
financial crisis. Despite the devastating 1994 Genocide in Rwanda, the country has witnessed
remarkable economic growth in recent years. This success story has been largely due to a
purposeful FDI attraction strategy. Before genocide, Rwanda’s economy was primarily based on
subsistence agriculture. The nation’s human capital and infrastructure were further damaged by
the battle. With GDP per capita $210 (PPP) in 1994, Rwanda ranked among the poorest countries
in the world. After genocide Rwandan government implemented significant economic reforms
intended to promote the investment and economic diversification. Including establishing the
Rwanda Development Board (RDB) as a one-stop shop for the investors, promoting political

9
stability and security and prioritizing infrastructure development. These measures produced more
attractive environment for foreign investors. This efforts to attract FDI have yielded significant
result. According to the United Nation Conference of Trade and Development (UNCTD), FDI
inflows to Rwanda have steadily increased recent years. In 2018 reached to USD 382 million and
in 2019 USD 420 million. The World Bank reports that FDI stock in Rwanda reached a record
high of USD 2.6 billion by the end of 2019. These figures highlight the growing importance of
FDI in the Rwandan economy. The inflows of the FDI is expected to contribute to Rwanda
economy through several channels, including job creation, technology transfer, infrastructure
development and increased exports, generating foreign exchange and boosting Economic growth.
According to UNCTD, wealthier nations typically receive a far higher percentage of FDI than
developing countries like Rwanda. This may make the world’s inequity worse. For the
continental Africa obtains a comparatively small share of global FDI compared to other
continents. The regional level Rwanda is up against other nations like Kenya and Ethiopia in the
East Africa area for foreign direct investment (UNECA). Rwanda’s emphasis on political
stability, business-friendly reforms, and investment in infrastructure development have
contribute to its success in attracting foreign direct investment as compared to its regional
counterparts (World Bank). Careful attention must also be given to how FDI projects may affects
the environment. Although certain foreign investment have the potential to introduce eco-
friendly technologies, others might put immediate profit ahead of sustainability over the long
run. Thus, the true issue is how to properly manage FDI to maximize its benefits and minimize
any possible negative effects. The foreign direct investment has impact on economic growth of
different countries, like at the regional level encourages the capital and infrastructure
development, increased tax revenues at the continental level, and global integration and trade at
the worldwide.

1.2 PROBLEM STATEMENT

Foreign Direct Investment (FDI), has advantages and disadvantages for developing nations.
Although it provides significant amounts of funding, technology, and employment opportunities,
it may also have unexpected effects. The real difficulty is maximizing FDI’s benefits for
sustained economic growth while reducing any potential negative impacts. FDI provides a

10
crucial financial increase on the one hand. It support important infrastructure initiatives, increase
overall investments, and raise the level of productivity in the country
(Agosin & Machado, 2005)
. Foreign capital inflows, however, can occasionally push out local companies, making it
more difficult for them to compete and grow. Furthermore, the introduction of more efficient
technology by foreign businesses raises the possibility of job losses in domestic industries with
lower level of competition, which raises concerns about the relocation of workers
(Sachs & Warner, n.d.)
.A strong reliance on FDI also leaves one open to change in the external economy.
The host nation may suffer a sharp decrease in investment and economic activity if foreign
businesses choose to return their earnings or relocate operations as a result of shifting global
market circumstances. Concerns regarding return of profits are also brought up by this
dependence. Foreign businesses might send a sizable amount of their revenues back to their
home nation in order to maximize shareholder returns. This reduce the possibility of local
reinvestment, which is essential for encouraging entrepreneurship and innovation at home.
Careful attention must also be given to how FDI projects may affects the environment. Although
certain foreign investment have the potential to introduce eco-friendly technologies, others might
put immediate profit ahead of sustainability over the long run. The long-term health and welfare
of the host country are at risk due to pollution and diminished resources caused by weak
environmental rules. Thus, the true issue is how to properly manage FDI to maximize its benefits
and minimize any possible negative effects. This calls for a balanced strategy. Initially, it is
critical to attract FDI that supports local worker skill development and technology transfer.
Developing native skills promotes long-term innovation and competitiveness by enabling the
host nation to profit from the knowledge and experience brought in by foreign businesses.
Secondly, strong rules and supervision are necessary to guarantee sustainable environmental
practices and fair labor practices. To reduce the environmental impacts of FDI projects and to
preserve worker’s rights, strict criterial should be set. Eventually, drawing foreign direct
investment in line with long-term economic objectives requires a clearly define national
development strategy. Investments that support domestic entrepreneurship, diversity, and
sustainable growth should be given top priority in this plan. Countries may realize the full
potential of foreign direct investment and use it to generate sustainable economic success by
taking an active and planned approach.

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1.3 PURPOSE OF THE STUDY

1.3.1 GENERAL OBJECTIVE

The main objective of this research was to investigate the impact of Foreign Direct Investment
(FDI) on economic growth of Rwanda.

1.3.2 SPECIFIC OBJECTIVES

. Examine how trade openness, government spending, inflation, labor force, foreign direct
investment and unknown lagged variable affect GDP growth.

. Estimate future GDP growth by using the selected independent variable’s values.

. Determine which variables are most statistically significant in affecting GDP growth.

1.4 RESEARCH QUESTIONS

. To what extent does foreign direct investment (FDI) affects the economic growth?

. To what extent is the projected GDP growth subject to variations in the independent
variables?

. Exists any relationships between these variables that affects the rate of GDP growth?

1.5 RESEARCH HYPOTHESIS

H 0 : Foreign direct investment has no statistically significant effects on Rwanda’s economic

growth. Where β 0 = 0

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 H 1 : Foreign direct investment has statistically significant effects on Rwanda’s economic
growth. Where β 0 ≠ 0

1.6 SIGNIFICANCE OF THE STUDY

Several studies have analyze the effects of foreign direct investment (FDI) on economic growth
of Rwanda. But we have not been able to find any recent studies dating back to the past 3 years.
Specifically, the importance of the study is that it attempts to identify the impacts of FDI inflows
on economic growth in Rwanda during 1990-2022, to help the decision-maker to make an
appropriate decision on the economic policies to be taken in relation to the foreign investment.

1.7 SCOPE OF THE STUDY

This research examine the consequences of FDI on economic growth in Rwanda over past years.
The data on FDI inflows and economic indicators will be collected from reliable sources such as
World Bank and Rwandan government agencies like NISR. The primary will be on GDP growth,
but job creation within key FDI sectors may also be analyzed. This research explores into the
internal dynamics of Rwanda’ FDI strategy and its impacts on various sectors.

1.8 LIMITATIONS OF THE STUDY

This research acknowledges limitations, including obtaining complete data on FDI’s impacts
within Rwanda’s sectors can be challenging, isolating the exact cause and effects between
Rwanda’s growth and FDI is difficult, the study might not capture FDI’s full long-term effects.
Despite these, the research aims to offer valuable insights of FDI’s role in Rwanda’s recent
economic growth.

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CHAPTER 2 LITERATURE REVIEW

2.0 INTRODUCTION

An overview of foreign direct investment and economic growth of Rwanda is provided in this
chapter, along with a several perspectives on how these areas relate to one another. This chapter
is divided into subsections, such as definitions of essential terminology, theoretical and empirical
literature, as well as research gap and conceptual framework.

2.1 DEFINITION OF KEY TERMS

This subsection becomes essential when technical phrase or concept are either unfamiliar or have
several meaning are used. Work in progress definitions are mentioned below.

2.1.1 Economic Growth

Economic growth is generally an expansion of an economy’s productive capacity overtime as it

is caused physical capital (Barro, 2013), human capital (Hans-jürgen, 2003) and institutional
framework (Institutions_institutional_change_and_ec, n.d.) . It is often measured by the growth
rate of the gross domestic product (GDP), which is the total monetary value of all final goods
and services produced in a country in a given year. Real GDP is an inflation adjusted measure
that expresses, in base year values, the total value of all goods and services produced in a given
year. Since real GDP growth is not influenced by the effects of severe inflation or deflation, it
provides a more realistic picture of the rate of economic expansion. Thus, growth in the home
economy is shown by an upward trend in real GDP. The first difference of the natural logarithm
of the yearly GDP volume indices multiplied by 100 has been utilized in this study to represent
Rwanda's domestic economic growth for each year.

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2.1.2 Inflation

Inflation refers to an abroad-based increase in the prices of goods and services in an economy
over time. This means that a unit of currency, like a USD, will gradually buy you less and less as
prices rise. It's often measured as a percentage change in the Consumer Price Index (CPI), which
tracks the average price of a basket of commonly purchased goods and services.

According to the (NISR, 2013) during 1990 to 1994 Rwanda saw hyperinflation with rate of
exceeding 100% annually. The 1994 genocide further increased the economic situation,
following years after genocide to 1995 to 2000 Rwandan government implemented economic
reforms and this achieved significant reduction of inflation, the following years inflation remain
relatively stable. But, in 2020 inflation rose due to the impacts of COVID-19 that occurred World
Wide. In 2022, inflation saw a significant increase due to global factors like rising Food and
Energy prices, reaching to 21.7% in November. As a December 2023, the inflation rate has
decreased to 6.4%, but remains higher than the pre-2022 levels.

2.1.3 Effectiveness

The degrees to which goals are achieved and to what extent targeted issues are solved. Unlike
efficiently, efficiency is determined without cost, and while efficiency means doing correct thing.
(http:/www.businnessdictionary.com/definition/effectiveness.html)

2.1.4 Foreign Direct Investment

A government, business, or investors from another nation may purchase an ownership stake in a
foreign project or company; this is known as foreign direct investment (FDI). Buying a foreign
company altogether or acquiring a sizable share in order to expand operations to a new area is
sometimes referred to as foreign direct investment (FDI). Generally speaking, the phrase does
not refer to a single stock investment in a foreign business. Since FDI forges enduring and
durable connections between economies, it is a crucial component of international economic
integration (Adams, 2009).

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2.2 IMPACTS OF FDI ON ECONOMIC GROWTH OF RWANDA

The Gross domestic product (GDP), which measures a country’s economic growth, is influenced
by a number of factors. For example, Trade openness may stimulate GDP. Research demonstrate
how enhanced specialization, competitiveness, and access to new markets brought about by free
trade can raise GDP (Frankel & Romer, 2017) . The effects of government expenditure are less
visible. Some research discover only minimal effects, although Aschauer (1989) believes that
infrastructure investment might encourage economic expansion (Aschauer, n.d.). On other hand,
inflation is usually seen negatively. High inflation hinders investment and hinders with economic
activity (Sanusi et al., 2017). According to Bloom et al. (2010), a larger worker force may raise
output potential, but skill levels are also critical (Bloom et al., 2018). Another possible engine of
growth is foreign direct investment. FDI can support economic growth by contributing capital,
skill, and technology (M. Wang, 2010). Finally, as mentioned, even unknown historical variables
might have an impact on current growth (Stock & Watson, 2017) . A country’s economic
trajectory is shaped by all of these elements, and fostering sustainable growth requires an
understanding of how they interact.

Foreign direct investment (FDI) provides new funding for essential projects, such as electricity
grids, communication technology, and transportation networks. This raises economic output and
general productivity. Through FDI, multinational business (MNCs) can bring new expertise and
technology to Rwanda. This advances manufacturing techniques, encourages creativity, and
raises local laborer’s skill level. By starting new enterprises or growing current ones, foreign
direct investment can generate new job possibilities. This can help to raise living standard and
reduce poverty. Overall FDI has positive impacts on economic growth of Rwanda. The Rwandan
government receives tax money from increased economic activity brought by foreign direct
investment. This revenues can be allocated towards the advancement of education, healthcare,
and social welfare programs.

2.3 ESTIMATION OF FUTURE ECONOMIC GROWTH

Modeling future GDP growth is crucial for well-informed policy and economic planning. One
common method is regression analysis, which makes use of several independent variables. But
there are obstacles to take into consideration. First of all, it is hard to achieve perfect precision.
This emphasize the significance of unplanned occurrences and non-linear correlations between

16
variables (Stock & Watson, 2017) . The model’s predictive power is strongly impacted by the
selection of independent variables. Sala-i-martin (1997) underlines how important it is to choose
appropriate variables based on economic theory and data. Emphasized that researchers can
choose a collection of independent variables that are most likely to yield reliable projections of
future GDP growth using regression analysis by merging ideas from economic theory with
appropriate data analysis (Sala-I-Martin, 2002). Lastly, there’s the model complexity balancing
job. Adding more variables can help the model fit the available data better, but it can also cause
overfitting, in which the model works well on the training set but is unable to generalize to new
scenarios (McLeay & Omar, 2000) . Regression analysis with several variables can provide
insightful information despite these limitations. A model with government expenditure, inflation,
and trade openness provide an accurate prediction than simpler models
(C. N. Wang & Le, 2018)
.

With skilled labor, developments in technology, and growth, Rwanda has the potential to achieve
significant growth in the coming years. The country is well-positioned for continued economic
expansion due to its impressive history, eager development plans, ongoing infrastructure
investment, and participation in regional trade agreements. Rwanda has a solid basis for
progress, yet problems still exist. Changes to the global economy, changes in the price of
commodities that Rwanda exports, and ongoing income inequality in the nation might all serves
as roadblocks to economic development and restrict the benefits of growth from bring fairly
distributed. The World Bank estimates Rwanda’s GDP growth would be around 6.3% in 2023
and 2024. The international monetary fund (IMF) projects Rwanda’s medium-term to be in range
of 5-6% in 2023. The actual future economic development of Rwanda may differ from these
projections due to a range of internal and external factors.

2.4 MOST STATISTICALLY SIGNIFICANT VARIABLE AFFECTING GDP GROWTH

Finding the factors that have most effects on GDP growth is a major focus of economic study.
Although regression analysis is frequently used, it is still unknown which variables have the
greatest statistical significance (Stock & Watson, 2017) . Literature highlights various factors
influencing GDP growth. In our study we select trade openness, government expenditure,
inflation, FDI, and labor forces. As demonstrated by many researchers. Finding the one or more
of these characteristics that is statistically significant in a given situation is crucial. Regression

17
analysis uses statistical tests, like P-values, to find factors that have a strong correlation with
GDP growth. P-values that are lower suggest a statistically significant influence. As a result,
experts are able to rank the factors that most consistently and precisely affects a country’s
economic performance.

Long-term growth depends on a competent labor force and appropriate expenditure by

governments, but these factors may have adverse effects. Increased trade openness and foreign
direct investment, which promotes technology transfer and talent development, appear to be the
main forces behind Rwanda’s economic growth. A more resilient and competitive economy is
produced by these elements, which also increase productivity, creativity, export potential, and
access to new technologies. All factors interact, even though trade openness and foreign direct
investment are probably excellent candidates for the majority of statistically significant variables.
The key to Rwanda’s success is putting policies into place that draw in attractive foreign direct
investment, make strategic investments in its citizens, and uphold a stable economic climate for
long-term, sustainable growth.

2.5 THEORETICAL AND EMPIRICAL LITERATURE

2.5.1 ECONOMIC GROWTH THEORIES

Economic growth is an increase or decrease of in values of goods and services that a geographic
area generate and sells more than it did in the past. If the value of goods and service is higher
than the previous year, it shows positive growth. When the value of goods and services is less
than the year before, it experience negative economic growth, also called depression
(Bano, n.d.)
.

2.5.1.1 Classical Growth Model Theory

Classical economists believed progress resulted from society’s material development. They
identified eight key factors influencing economic growth, with capital accumulation through
reinvestment being main driver. Technological advancements and population growth were also
seen as important contributors. Their analysis laid the groundwork for future economic growth
theories. ( Donald. J. Harris. 1982).
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2.5.1.2 Neo-Classical Growth Model Theory
An economic model that describes what propels an economy's long-term growth is the
neoclassical growth theory. It makes the case that advancements in labor, capital, and technology
lead to a consistent and sustainable growth in output (goods and services). The neo-classical
growth theory places a strong emphasis on capital accumulation and saving as important driver
of economic growth. The Solow growth model is the primary framework for assessing growth in
the neoclassical approach. According to the Solow model, technological developments are the
only factor that can lead to a long-term increase in output per worker. Short-term development,
however, could result from capital accumulation or technological breakthroughs. (
Cesaratto, 1999
).

2.5.2 EMPIRICAL LITERATURE

There are large studies that examined the effect of foreign direct investment (FDI) on economic
growth in Rwanda. The foundation of theories for the empirical studies on FDI and growth
derives the either in classical or neoclassical model of growth. The neoclassical growth model
consider FDI as an additional to capital stock of the host countries. FDI has no permanent impact
on growth rate within the assumption of diminishing return to physical and technological change
being external.

Despite the fact that some studies observe a positive impact on FDI on economic growth, other
detects a negative relationship between the variables. The long-term impacts of FDI moves on its
contribution to capital accumulations, ultimately influencing a country’s growth rate. However,
the effectiveness can be limited by the factors like the availability of skilled labor (absorptive
capacity) and the type of FDI. Beyond directly increasing capital, FDI can influence growth
through technology transfer and knowledge flows. This can happen through employ training,
introduction of new management practice, and overall diffusion of expertise within the
beneficiary economy (De Mello, 1997). A country’s human capital highlights the crucial role in
maximizing benefits of FDI. A skilled workforce is better equipped to absorb and utilize the
transferred knowledge and technologies (Lee & Chang, 2009) . The documents explores

19
contrasting viewpoints. Some argues that FDI can have negative consequences, returning of
profit and transfer pricing strategies can potentially harm domestic. (Carkovic & Levine, 2002)
cautions that the effects of FDI on growth might not be universally positive. His research
suggests a lack of strong evidence for a direct link, and questions whether human capital plays a
significant role.

2.6 CONCEPTUAL FRAMEWORK

This research will use different variables: independent variables, dependent variables and
intervening variables. Where independent variables is foreign direct investment (FDI), which
includes, inflation, government expenditure, labor force and trade openness Dependent variables
is the Real GDP and finally the intervening variables these interacts the government policies.

Independent variables

Foreign direct investment (FDI)

Inflation (INFL)

Government Expenditure (GOV_EXP)

Labor force (LBR_FC)

Trade Openness (TRADE_OP)

Dependent variables

Economic Growth (GDP)

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Independent variable Dependent variable

INFL

GOV_EXP

TRADE_OP Real GDP Growth

FDI

LBR_FC

Intervening variable

Government polices

Human capital development

Technology transfer

2.7RESEARCH GAP

This study used probably a regression model to examine the relationship between foreign direct
investment effects on economic growth in Rwanda. This research topic looked at how foreign
direct investment and their factors affects economic growth. Used econometrics analysis method
in a numerical way, which is a standard techniques in subject. The previous authors did not went
deeper dive into the FDI, although the analysis probably focused on FDI as a whole. But, our
dissertation can examine particular industries or categories of FDI that have the most effects on
Rwanda’s economic growth.

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CHAPTER 3: RESEARCH METHODOLOGY

3.1: Introduction

A methodical process of conducting research is known as research methodology. Research

methodology is a scientific field of study. Research essentially refer to the methods used by the
scientist to describe, explain, and anticipate the occurrences techniques in the work
(Akanle et al., 2017)
. In this chapter we explore the impacts of foreign direct investment on the economic
growth in Rwanda. Not only but also includes the techniques used in data analysis to know the
relationship between foreign direct investment and economic growth. The selected methodology
(quantitative approach) and the particular model employed to examine the data on FDI inflows,
economic growth, and other related factors are then described in depth. In order to build on this
study, it concludes by acknowledging the limits of the selected methodologies and data and
offering potential areas for further investigation.

3.2 RESEARCH APPROACH AND RESEARCH DESIGN

This research used a quantitative approach to investigate effects of foreign direct investment
(FDI) on Rwanda’s economic growth. Through the use of statistical techniques and data analysis,
quantitative research looks for pattern in data and test hypothesis. The research design is a blue
print showing how data collected, processed that needs to resolve research questions. This study
followed quantitative approach, focusing on numerical data, to quantify and identify the
relationship between the economic growth and foreign direct investment in Rwanda. We will use
the Econometric model to measure the correlations between the impacts of foreign direct
investment on the economic growth. The relationship between foreign direct investment and
economic growth will be examined using regression analysis econometrics model in quantitative
research methodology.

3.3 TARGET POPULATION

Whenever talking about to foreign direct investment (FDI), countries or regions that are actively
attempting to attract in the FDI are the target demographic rather than actual people.

22
3.4 DATA SOURCE

3.4.1 SECONDARY DATA

Secondary data refer to data that is collected by someone other than the user. This research uses
secondary data to obtain the inflation, government expenditure, foreign direct investment, labor
force, trade opens and GDP growth from 1990 to 2022 from the Rwanda economics statistic
database published by World Bank in 2022. We will use different methods to analyze data so that
the arguments and conclusions are presented clearly.

3.5 DATA COLLECTION

Leveraging pre-existing datasets from government agencies and academic institutes, conducting
surveys and using specialized technologies are all part the of quantitative data collection process
on our study. The utilization of this research is dependent upon the secondary data. Annually,
time series data covering the years 1990-2022 is employed. The variables included in the time
series data were taken from the data that the World Bank, NISR, and BNR provided. Journals,
reports, and websites with more information are examples of data collection tools.

3.6 DATA ANALYSIS

Data analysis is the process of inspecting, cleaning, transforming and modeling data with goal of
discovering useful information, suggesting conclusion, and supporting decision-making.

Appropriate method would be used to examine the data in order to produce research that is
understandable and helpful. Multiple regression analysis is the techniques used for analysis
because the data being examined is time series data. This study will use EVIEWS as a tool to
collect all descriptive and statistical analysis.

3.6.1 METHODS OF DATA ANALYSIS

3.6.1.1 ECONOMETRIC ANALYSIS METHOD

3.6.1.1.1 UNIT ROOT TEST

23
Here, it should be noted that before subjecting our data to stationary test, it is necessary to
perform the spurious analysis, which is the comparison of Durbin-Watson statistic (DW) and
coefficient of determination ( R2). If the R2 > DW then there is sign of non-stationarity by using
the graphs. Theoretically, as stated by Holmes et al. (2020), Augmented Dickey-Fuller (ADF) is
the new version of ordinary Dickey-Fuller Here, it assume that the variables under study are non-
stationarity at 5% level of significant.

3.6.1.1.2 STATIONARITY TEST

Stationarity is a widely accepted assumption in many modeling approaches and is very helpful.
The procedures' time series may show signs of non-stationarity. When analyzing the relationship
between effects of foreign direct investment and economic growth, determining stationarity is a
crucial step. A time series' stationarity ensures that its statistical properties, such as its variance
and mean, don't change with time. Regression results may be misleading if the data is non-
stationary

3.6.1.1.3 CO-INTERGRATION TEST

After the stationarity has been found,’’ the question of whether a long-run relationship among the
variables arises’’. Abraham (2018), co-integration test used to verify the existence of a long-run
relationship among variables. Here, it should be noted that the variables to be tested must be non-
stationarity and all variables should be integrated at the same order. After time series variables
under the study (5%) failed the stationarity tests, then they should be integrated after the first-
difference (I (1)).

3.6.1.1.4 ERROR CORRECTION MODEL (ECM)

Error correction model (ECM) refer to an appropriate strategy which accounts for both long-run
and short-run fluctuations in model (Shahjahan et al.; 2015). Then we will adjust the equation
after examining the residuals. On the other hand, the error will be reduced if the co-integrated
equation's R (-1) residual has a negative sign. If the co-integrated equation's (1) residual has a
positive sign, this suggests that there is no econometric meaning to imply that the mistake will
grow with time

24
3.7 MULTIPLE REGRESSION MODEL

The purpose of this study was to describe the relationship between the effects of foreign direct
investment on Economic growth in Rwanda. The study used a regression model to ascertain the
current relationship. The below multi regression model was used in our study.

ln GDP = β 0 + β 1 ln FDI + β 2 ln INFL + β 3 lnGOV exp + β 4 ln LBR FC + β 5 lnTRADE OP+ ε

Where:

Dependent variables = GDP

Independent variables

Consumer price index (INFL)

Foreign direct investment (FDI)

Government expenditure (GOV_EXP)

Labor forces (LBR_FC)

Trade opens (TRADE_OP)

β 0 is the intercept of the model

β 1, β 2, β 3, β 4 , β 5 are the coefficient of the independent variables

ε is the error term at time t

3.8 DATA SUMMARY AND PRESENTATION

Regression analysis is a useful technique, but it’s important to be aware of its limitation and any
underlying errors in the data that were employed. These limitations emphasize the need for
additional study that uses a variety of data sources. Then a number of analyzes brought about this
study, variables will be then test for the summarized into statistical diagrams and statistical
presentation. This will be done using EVIEWS software.

25
CHAPTER 4 FINDINGS, RESULTS AND DICUSSION

4.1 INTRODUCTION

This chapter discusses the results showing how inflation, government expenditure, labor force,
trade opens and foreign direct investment have effects on GDP in Rwanda. . Description of time
series data including fundamental test, stationary test, co-integration test, error correction
methods and method modifications in non-stationary environment, inflation and economic
growth

4.2 DESCRIPTIVE OF REGRESSION MODEL

Overview of the data. Includes E-views with basic tests that are stationary or non-stationary, and
integration using advanced Dickey-Fuller testing and ECM

4.2.1 UNIT ROOT TEST

By conducting simple measurements of the variables in a study, baseline testing enables

researchers to locate data. In both cases, a Dickey-Fuller reconstruction was carried out. In order
to ensure the stationarity of the data used in econometric models, unit root tests are essential
techniques in time series analysis. This may create more accurate and dependable models and
prevent inaccurate results by carrying out these tests.

26
4.2.1.1 TESTING STATIONARITY OF CPI (INFL)

Null Hypothesis: INFL has a unit root

Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=1)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -3.763072 0.0076

Test critical values: 1% level -3.653730
5% level -2.957110
10% level -2.617434

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(INFL)
Method: Least Squares
Date: 06/13/24 Time: 11:13
Sample (adjusted): 2 33
Included observations: 32 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

INFL(-1) -0.642853 0.170832 -3.763072 0.0007

C 5.923766 2.265229 2.615085 0.0138

R-squared 0.320663 Mean dependent var 0.321875

Adjusted R-squared 0.298019 S.D. dependent var 11.52777
S.E. of regression 9.658469 Akaike info criterion 7.434009
Sum squared resid 2798.581 Schwarz criterion 7.525617
Log likelihood -116.9441 Hannan-Quinn criter. 7.464374
F-statistic 14.16071 Durbin-Watson stat 1.932600
Prob(F-statistic) 0.000729

From the above table, the Augmented Dickey-Fuller (ADF) test statistic suggest that the
consumer price index (CPI) series does not possess a unit root. This shown by p-value of 0.0076,
which is less than the critical values at 1%, 5% and 10% of significant levels. Thus we reject the

27
null hypothesis of occurrence of a unit root, indicating that the CPI is the series of stationarity at
level.
The coefficient of INF (-1) is statistically significant with p-value of 0.0007. While the
regression statistics shows a moderate of R-Squared value of 0.320663. The F-statistic is also
significant, indicating that the overall model is statistically significant.
Basing on these results, we can realize that the CPI series is stationary, implying that it exhibits
stable statistical properties over time. This shows that CPI time series is stationary at level since
the coefficient of its 1st lag is negatively statistically significant and Ho is rejected.
4.2.1.2 TESTING STATIONARITY OF GDP

Null Hypothesis: GDP has a unit root

Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=1)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -6.194878 0.0000

Test critical values: 1% level -3.653730
5% level -2.957110
10% level -2.617434

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(GDP)
Method: Least Squares
Date: 06/13/24 Time: 11:15
Sample (adjusted): 2 33
Included observations: 32 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

GDP(-1) -1.116015 0.180151 -6.194878 0.0000

C 6.613022 2.418749 2.734067 0.0104

R-squared 0.561253 Mean dependent var 0.331250

Adjusted R-squared 0.546628 S.D. dependent var 18.44869
S.E. of regression 12.42204 Akaike info criterion 7.937283
Sum squared resid 4629.213 Schwarz criterion 8.028892
Log likelihood -124.9965 Hannan-Quinn criter. 7.967649
F-statistic 38.37652 Durbin-Watson stat 2.037736
Prob(F-statistic) 0.000001

28
From the above table, the Augmented Dickey-Fuller (ADF) test statistic suggest that the Real
GDP series does not possess a unit root. This shown by p-value of 0.0000, which is less than the
critical values at 1%, 5% and 10% of significant levels. Thus we reject the null hypothesis of
occurrence of a unit root, indicating that the Real GDP is the series of stationarity at level.

The regression statistics shows a moderate of R-Squared value of 0.561253. The F-statistic is
also significant, indicating that the overall model is statistically significant.

Basing on these results, we can realize that the Real GDP series is stationary, implying that it
exhibits stable statistical properties over time. This shows that Real GDP time series is stationary
at level since the coefficient of its 1st lag is negatively statistically significant and Ho is rejected.

29
4.2.1.3 TESTING STATIONARITY OF FDI

Null Hypothesis: D(FDI) has a unit root

Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=1)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -9.633555 0.0000

Test critical values: 1% level -3.661661
5% level -2.960411
10% level -2.619160

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(FDI,2)
Method: Least Squares
Date: 06/13/24 Time: 11:17
Sample (adjusted): 3 33
Included observations: 31 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

D(FDI(-1)) -1.545939 0.160474 -9.633555 0.0000

C 0.117332 0.136134 0.861890 0.3958

R-squared 0.761915 Mean dependent var 0.036721

Adjusted R-squared 0.753705 S.D. dependent var 1.524393
S.E. of regression 0.756527 Akaike info criterion 2.342183
Sum squared resid 16.59764 Schwarz criterion 2.434698
Log likelihood -34.30383 Hannan-Quinn criter. 2.372341
F-statistic 92.80539 Durbin-Watson stat 1.962657
Prob(F-statistic) 0.000000

From the above table, the Augmented Dickey-Fuller (ADF) test statistic suggest that the (FDI)
series does not possess a unit root. This shown by p-value of 0.0000, which is less than the
critical values at 1%, 5% and 10% of significant levels. Thus we reject the null hypothesis of
occurrence of a unit root, indicating that the FDI is the series of stationarity at level.

30
The coefficient of FDI (-1) is statistically significant with p-value of 0.0000. While the
regression statistics shows a moderate of R-Squared value of 0.761915. The F-statistic is also
significant, indicating that the overall model is statistically significant.

Basing on these results, we can realize that the FDI series is stationary, implying that it exhibits
stable statistical properties over time. This shows that FDI time series is stationary at level since
the coefficient of its 1st lag is negatively statistically significant and Ho is rejected.

4.2.1.4 TESTING STATIONARITY OF GOVERNMENT EXPENDITURE

Null Hypothesis: GOV_EXP has a unit root

Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=1)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -6.968509 0.0000

Test critical values: 1% level -3.653730
5% level -2.957110
10% level -2.617434

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(GOV_EXP)
Method: Least Squares
Date: 06/13/24 Time: 11:18
Sample (adjusted): 2 33
Included observations: 32 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

GOV_EXP(-1) -1.236210 0.177400 -6.968509 0.0000

C 11.20973 3.837200 2.921329 0.0066

R-squared 0.618127 Mean dependent var 0.106918

Adjusted R-squared 0.605398 S.D. dependent var 31.43532
S.E. of regression 19.74684 Akaike info criterion 8.864326
Sum squared resid 11698.13 Schwarz criterion 8.955934
Log likelihood -139.8292 Hannan-Quinn criter. 8.894691
F-statistic 48.56011 Durbin-Watson stat 2.015269
Prob(F-statistic) 0.000000

31
Based on the ADF test results, we reject the null hypothesis that GOV_EXP has a unit root. This
indicates that the time series GOV_EXP is stationary. The regression analysis from the ADF test
equation supports this conclusion, showing that the coefficient for the lagged level term is
significantly different from zero.

4.2.1.5 TESTING STATIONARITY OF LABOR FORCE

Null Hypothesis: LBR_FC has a unit root

Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=1)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -5.811192 0.0000

Test critical values: 1% level -3.653730
5% level -2.957110
10% level -2.617434

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LBR_FC)
Method: Least Squares
Date: 06/13/24 Time: 11:20
Sample (adjusted): 2 33
Included observations: 32 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

LBR_FC(-1) -1.058896 0.182217 -5.811192 0.0000

C 1.317459 1.888212 0.697728 0.4907

R-squared 0.529559 Mean dependent var 0.037187

Adjusted R-squared 0.513878 S.D. dependent var 15.21516
S.E. of regression 10.60838 Akaike info criterion 7.621628
Sum squared resid 3376.134 Schwarz criterion 7.713236
Log likelihood -119.9460 Hannan-Quinn criter. 7.651993
F-statistic 33.76995 Durbin-Watson stat 1.035795
Prob(F-statistic) 0.000002

32
Based on the ADF test results, we reject the null hypothesis that Labor force has a unit root. This
indicates that the time series labor force is stationary. The regression analysis from the ADF test
equation supports this conclusion, showing that the coefficient for the lagged level term is
significantly different from zero.

4.2.1.6 TESTING STATIONARITY OF TRADE OPENS

Null Hypothesis: D(TRADE_OP) has a unit root

Exogenous: Constant
Lag Length: 1 (Automatic - based on SIC, maxlag=1)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -6.371812 0.0000

Test critical values: 1% level -3.670170
5% level -2.963972
10% level -2.621007

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(TRADE_OP,2)
Method: Least Squares
Date: 06/13/24 Time: 11:22
Sample (adjusted): 4 33
Included observations: 30 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

D(TRADE_OP(-1)) -1.979271 0.310629 -6.371812 0.0000

D(TRADE_OP(-
1),2) 0.344915 0.180861 1.907070 0.0672
C 2.273212 1.826884 1.244311 0.2241

R-squared 0.765828 Mean dependent var 0.266526

Adjusted R-squared 0.748482 S.D. dependent var 19.61116
S.E. of regression 9.835301 Akaike info criterion 7.504473
Sum squared resid 2611.795 Schwarz criterion 7.644592
Log likelihood -109.5671 Hannan-Quinn criter. 7.549298
F-statistic 44.14999 Durbin-Watson stat 2.036387
Prob(F-statistic) 0.000000

33
Based on the ADF test results, we reject the null hypothesis that Trade opens has a unit root. This
indicates that the time series Trade opens is stationary. The regression analysis from the ADF test
equation supports this conclusion, showing that the coefficient for the lagged level term is
significantly different from zero.

4.2.1.7 TESTING FOR CO-INTEGRATION

Null Hypothesis: U has a unit root

Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=1)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -6.127332 0.0000

Test critical values: 1% level -3.653730
5% level -2.957110
10% level -2.617434

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(U)
Method: Least Squares
Date: 06/13/24 Time: 11:26
Sample (adjusted): 2 33
Included observations: 32 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

U(-1) -1.083953 0.176905 -6.127332 0.0000

C 0.304007 1.280595 0.237395 0.8140

R-squared 0.555846 Mean dependent var 0.424152

Adjusted R-squared 0.541041 S.D. dependent var 10.69176
S.E. of regression 7.243291 Akaike info criterion 6.858490
Sum squared resid 1573.958 Schwarz criterion 6.950098
Log likelihood -107.7358 Hannan-Quinn criter. 6.888855
F-statistic 37.54420 Durbin-Watson stat 1.971213
Prob(F-statistic) 0.000001

34
Since the test statistic is much more negative than critical value and p-value is very low, we
strongly reject the null hypothesis. This means U likely does not have a unit root. This analysis
suggest that U is stationarity time series. Where:
R-squared is 0.555846
P-value is 0.0000
Critical values (1%, 5%, 10%)
ADF ( Augmented Dickey-Fuller) statistic is very negative at (-6.127332)

4.2.1.8 ESTIMATION OF LONG-RUN REGRESSION MODEL

Dependent Variable: GDP

Method: Least Squares
Date: 06/13/24 Time: 11:52
Sample: 1 33
Included observations: 33

Variable Coefficient Std. Error t-Statistic Prob.

C 11.46177 5.548991 2.065560 0.0486

INFL 0.384493 0.150724 2.550967 0.0167
FDI 4.230281 1.414422 2.990820 0.0059
GOV_EXP 0.327232 0.078212 4.183922 0.0003
TRADE_OP -0.460584 0.152340 -3.023399 0.0054
LBR_FC -0.288311 0.140538 -2.051483 0.0500

R-squared 0.645150 Mean dependent var 5.706667

Adjusted R-squared 0.579437 S.D. dependent var 12.19756
S.E. of regression 7.910226 Akaike info criterion 7.137156
Sum squared resid 1689.435 Schwarz criterion 7.409248
Log likelihood -111.7631 Hannan-Quinn criter. 7.228706
F-statistic 9.817680 Durbin-Watson stat 2.100986
Prob(F-statistic) 0.000020

R-squared values is 0.645, indicating that the model explain about 64.5% of the variation in GDP
Adjusted R-squared value is 0.579, which is more reliable measures for small dataset, and is still
relatively high

35
The F-statistic (9.817680) and it’s p-value (0.000020) both suggest that overall model is
statistically significant, which shows that there’s relationship between independent variables and
GDP
Each independent variable has a coefficient and a p-value. A significant p-value (<0.05) suggest
that the corresponding variable has a statistically significant impact on GDP, except labor force,
which has a negative impact on GDP, but the significant is borderline p-value (= 0.05)
Overall, this regression analysis suggest that the model can explain the significant portion on
variation of GDP. Where factors like inflation, foreign direct investment, and government
expenditure and trade openness appears to have positive influences on GDP.

4.2.1.9 ERROR COLLECTION MECHANISM (ECM) AND SHORT RUN

RELATIONSHIP

Dependent Variable: D(GDP)

Method: Least Squares

Date: 06/13/24 Time: 11:59

Sample (adjusted): 2 33
Included observations: 32 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C 1.236313 0.937553 1.318659 0.1992

D(INFL) 0.398462 0.099581 4.001382 0.0005
D(FDI) 1.962803 1.111331 1.766173 0.0896
D(GOV_EXP) 0.181037 0.038166 4.743397 0.0001
D(LBR_FC) -0.202161 0.065391 -3.091560 0.0048
D(TRADE_OP) -0.999136 0.101746 -9.819888 0.0000
U(-1) -0.765100 0.160644 -4.762715 0.0001

R-squared 0.935664 Mean dependent var 0.331250

Adjusted R-squared 0.920223 S.D. dependent var 18.44869
S.E. of regression 5.210801 Akaike info criterion 6.329984
Sum squared resid 678.8111 Schwarz criterion 6.650614
Log likelihood -94.27974 Hannan-Quinn criter. 6.436264
F-statistic 60.59719 Durbin-Watson stat 1.995484
Prob(F-statistic) 0.000000

36
The R-squared is very high (0.935), indicating that the model explain a very large portion (over
93.5%) of the variation in change of GDP

Adjusted R-squared value is also high (0.9202), suggesting that the model fits well even
considering the number of variables.

The F-Statistic and its p-value imply a very statistically significant model, meaning that the
independent variables together have a strong relationship with the change in GDP.

All independent variables has coefficient and a p-value (<0.05). Suggests that there’s statistically
significant impacts on change of GDP. Except (FDI), which have negative impact on GDP

Overall, this regression analysis suggests a strong model explaining the change in GDP.

st
1 Objective

More GDP growth is correlated with more government expenditure and inflation, although
excessive inflation may have unfavorable long-term effects. Where government expenditure, the
coefficient is (0.181037) and P-value (0.0001) this aligns with the idea that government
expenditure can stimulate economic activity. Inflation’s coefficient (0.398462) and P-value
(0.0005) this suggests that an increase in inflation associated with an increase in GDP
growth .Unexpectedly, a greater labor force has a negative correlation with GDP growth,
pointing to a potential skills mismatch. Foreign direct investment effects are unclear. Because the
coefficient (1.962803) but the P-value (0.0896), which is greater than 5% level of significant.
This suggests that increase in FDI associated with increase in GDP growth, but the evidence is
not conclusive in the specific model. According to this model, trade openness and GDP growth
are inversely correlated, yet this could be the result of particular data or call for more research.
GDP growth is being hindered by a major unknown factors from previous years. Recall that there
are likely additional factors influencing GDP growth besides this one model. It is advised to
conduct additional research to get a better view.

nd
2 Objective

37
Once you have to the expected values of the independent variables for the upcoming period, you
can use the model’s coefficient to estimate GDP growth.

The expected future of the variables: INFL (2%), FDI (5%), GOV_EXP (3%), LBR_FC (1.5%),
TRADE_OP (-2%) it’s decreasing.

Estimated GDP = 1.236313 + (0.398462*0.02) + (1.962803*0.05) + (0.181037*0.03) + (-

0.202161*0.015) + (-0.999136*-0.02) – (-0.765100)

After following all possible orders of operations (PEDMAS)

D (GDP)) represents the predicted future growth GDP, which is 2.03% based on the future
example variable values and the given equation. Since this is still only an estimate, unexpected
occurrences and model limitations may cause the actual GDP growth to differ. The model makes
the assumption that the variables always have the same connection, which may not hold true in
practice. The limits of using this model exclusively for prediction are brought to light by the
existence of unexplained components (indicated by the constant terms).

rd
3 Objective

To determine which variables are most statistically significant in affecting GDP growth. We
based on the P-values. Where the most significant are those with the P-value that is less than
(0.05), which is inflation, trade openness, government expenditure, and labor force. While the
foreign direct investment are not significant because the P-value (0.0896) is greater than standard
5% level. It is not always the case that variables that are statistically significant also directly
influence change in GDP growth. There may be additional variables involved. Variables
considered in the study are taken as factors by the model. There may be more unlisted elements
influencing GDP growth. The existence of the lagged variable raises the possibility that GDP
growth is being influenced by additional, unseen causes.

DISCUSSION

The study ‘’Effects of Foreign Direct Investment on Economic Growth of Rwanda’’. The study
was guided by three objective; firstly, examine how foreign direct investment and its variables

38
affects economic growth. Secondly, Estimate future GDP growth by using the selected
independent variable’s values. Lastly, Determine which variables are most statistically significant
in affecting GDP growth. The key points or findings; firstly, FDI affects positively economic
growth. Secondly, the estimated future GDP growth is 2.03%. Thirdly, the most statistically
significant variables are those with the P-value that is less than 5% of significant level.

The findings existing in the literature shows positive effects of FDI on economic growth of
Rwanda. The estimate future GDP growth would be around 6% in 2023 and 2024. Not all
variables affecting GDP growth direct, some affect indirectly like labor force and government
expenditure. Remarkably, the literature implies that FDI concentrating on technology transfer
and skill development could have a special effects. The findings existing in the current study
provide the positive effects of foreign direct investment on economic growth but not statistically
significant. The estimated future GDP growth is 2.03%. The inflation, trade openness,
government expenditure, and labor force are the most statistically significant affecting economic
growth. Although these limitations, the econometric study offers a useful beginning points for
studying the variables influencing Rwanda’s economic expansion. We can evaluate the data
carefully and highlights areas that require more investigation by being aware of these limitations.

This study offers insightful information about the multiple variables influencing GDP growth.
The limitations and surprising results, however, emphasize the necessity of additional study to
create a more thorough understanding. Future studies can improve the model and produce more
reliable estimate of the variables affecting a nation’s economic growth by addressing these
shortcomings and adding new variables.

39
CHAPTER 5 SUMMARY, CONCLUSION AND RECOMMANDATION
5.1 INTRODUCTION

This study give a big note on effects of foreign direct investment on the Economic growth in
Rwanda for more than 31 years (1990-2022) and it involved in Data analysis, interpretation and
results of the discussion of the whole study and I come up with the following conclusion and
recommendations.

5.2 SUMMARY OF FINDINGS

The main purpose of this study is to examine the impacts of foreign direct investment on
economic growth in Rwanda over period of 1990. The test statistic has done among them are
stationarity, co-integration, and correction error model and below are the summary of findings:

The foreign direct investment has positive but not statistically significant effects on economic
growth of Rwanda. Based on the provided model and expected future value of independent
variables the estimated future growth is 2.03% .The actual future economic development of
Rwanda may differ from these projections due to a range of internal and external factors. The
most significant are those with the P-value that is less than (0.05), which is inflation, trade
openness, government expenditure, and labor force.

5.3 CONCLUSIONS

The main objective of the study was to assess the effects of foreign direct investment on
economic growth in Rwanda over period 1990-2022. Therefore, the study concludes that foreign
direct investment have positive effect but not statistically significant effects on economic growth
of Rwanda. But, some researchers believe that foreign direct investment has negative impacts on
economic growth.

5.4 RECOMMANDATIONS

Due to the above findings and conclusion as a researcher I suggests the following
recommendations to the Rwandan government can develop a workforce that is more proficient
and effective by investing in the skills of its citizens. This could lead to increased investment,
enhanced innovation and eventually sustained economic growth. Rwanda Development Board
(RDB) that develops policies that target attracting foreign direct investment (FDI) that promotes
the technology transfer and skill development. This study offers insightful information about the

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multiple variables influencing GDP growth. The limitations and surprising results, however,
emphasize the necessity of additional study to create a more thorough understanding. Future
studies can improve the model and produce more reliable estimate of the variables affecting a
nation’s economic growth by addressing these shortcomings and adding new variables.

41
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