Impact of Gross Capital Formation and Foreign Direct Investment on Economic Growth in Rwanda (1990-2017)
- 1 Department of Civil Engineering, Rwanda Polytechnic, Kigali, Rwanda
- 2 Department of Civil Engineering, Rwanda Polytechnic, Kigali, Rwanda
Abstract
This study investigates the determinant of economic growth in Rwanda, using time series data for the period 1990-2017. These data have been analy z ed and interpreted using statistical, analytical, synthetic methods as well as an econometrical approach. The economy of Rwanda represents the research gap about the components and determinants of economic growth as instrument policies to alleviate poverty and rise out production. The objective was to test the trends and relationship between capital formation, foreign direct investment and economic growth in Rwanda. This research tested and confirmed the following: gross capital formation and foreign direct investment are the main determinants of economic growth in Rwanda for the period under study. R-square, the overall measure of goodness of fit indicates that the explanatory variables included in the above model explain 89.3% of the variation of the dependent variable (GDP growth) for the long run regression model and 97% for the error correction model. The error correction model shows that the speed back to equilibrium is 86.4% that is when a shock happens in the previous period it decreases by 86% in the current period. This indicates that there is a significant short - run relationship as it was shown by the coefficients of the error correction model which are significant. Based on the existence of a long - run co-integrating relationship and the short - run interactions, the researcher tested and confirmed that there was a short - run and long - run posi tive relationship between capital formation, foreign direct investment and economic growth in Rwanda during the research period. The study reveals that capital formation has a significant positive effect on gross domestic product in the long run. The policy-makers should formulate policies by looking at the determi nants of growth as they are crucial in the process of economic growth and have a positive remarkable role in the economic acceleration.
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