DETERMINANTS OF FOREIGN DIRECT INVESTMENT IN RWANDA

Abstract: This study attempts to examine the factors determining foreign direct investment in Rwanda for the period 1970-2019. The study considers trade openness, market size, and government expenditure as the determinants of FDI inflows. Time series analysis is used to examine the significant determinants of FDI inflows in Rwanda. The study employs Johansen cointegration test and VECM to establish a relationship between FDI and its determinants. The findings indicate that trade openness (measured by sum of exports and imports as a ratio of GDP) has a significant long run positive relationship with FDI. This implies that trade openness is an important determinant of foreign direct investment in Rwanda. On the other hand, market size and government expenditure are not significant determinants of FDI inflows in Rwanda. The study concludes that openness of the Rwandan economy to a large extent explains the direction of FDI inflows in the country and that foreign investors in Rwanda are not market-seeking.