Title: Determinants of FDI inflows into Rwanda: 1971–2003

Authors: Sung C. No, Andrew Muhammad, Caleb Tamwesigire, Fred Mugisha

Addresses: Department of Economics and Finance, Southern University and A&M College, P.O. Box 9723, Baton Rouge, Louisiana 70813, USA. ' Department of Agricultural Economics, Mississippi State University, P.O. Box 5187, Mississippi State, Mississippi 39762, USA. ' Makerere University Business School, P.O Box 1337, Kampala, Uganda. ' National University of Rwanda, Faculty of Economics and Management, Rwanda

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.

Keywords: forecast error variance decomposition; foreign direct investment; FDI; impulse response functions; Rwanda; vector autoregressive; impulse response functions; economic growth; exchange rate; inflation rate.

DOI: 10.1504/IJFSM.2008.019671

International Journal of Financial Services Management, 2008 Vol.3 No.2, pp.200 - 212

Published online: 19 Jul 2008 *

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