Determinants of FDI inflows into Rwanda: 1971 2003

Abstract

Empirical results suggest that economic growth and trade openness have a significant positive impact on foreign direct investment (FDI) inflows in Rwanda. Depreciation of the real exchange rate stimulates FDI inflows and the inflation rate does not significantly affect FDI inflows. Results of the forecast error variance decomposition and impulse response functions indicate that the most important determinant to FDI inflows is growth. In fact, long-lasting effects of an increase in economic growth on FDI inflows are found. Interestingly enough, FDI fully reacts to an unexpected increase in economic growth only after three years. Secondly, the real exchange rate effect on FDI flows are found in both the static and dynamic models. However, the impacts of trade and debt ratio on FDI flows are not as significant in the static model as in the dynamic model. Lastly, the impact of the inflation rate on FDI flows in both models was trivial.