Effect of foreign direct investment on manufacturing output in Rwanda (2000-2021)

Abstract

This study examined the effect of foreign direct investment on manufacturing output in Rwanda for the period from 2000 to 2021.The analysis of the study used secondary quarterly data from National institute of statistics of Rwanda publications from monetary fund world bank database. The Vector Error Correction method was used to test for the short and long run relationship and also the Granger causality test was applied to test for causality among the variables. The variables that were investigated in this study included Manufacturing output, foreign direct investment and also, this study adopted control variables such as inflation rate, exchange rate, interest rates. The results showed that foreign direct investment had a positive effect on manufacturing output in the long run. The findings also revealed that inflation rate, interest rate and exchange rate affect manufacturing output negatively in the long run period at 5% level of significance. From the short-run model, only inflation rate found to have a negative and statistically significant effect on manufacturing output and the error correction term results show adjustment toward equilibrium by about 10.8% within a quarter. The Granger-causality tests showed that foreign direct investment granger causes manufacturing output but manufacturing output does not granger cause foreign direct investment which indicates a unidirectional relationship running from foreign direct investment to manufacturing output. Empirically, foreign direct investment found to have a significant influence on Rwanda's manufacturing sector output. Therefore, the study recommends that Rwanda needs to make a favorable business environment by implementing policies that simplify procedures, reduce bureaucracy, and tackle corruption to attract and retain foreign direct investment. This will result in the manufacturing sector being able to attract advanced technology, expertise, and capital investment. However, policymakers should focus on enhancing domestic firms' competitiveness by creating targeted support programs for finance, skills development, and technology transfer from foreign investors to minimize any negative consequences.