Effects of foreign direct investment on economic growth: evidence from Nigeria and Rwanda

Abstract

Rwanda economy is considered to be the fastest growing economy in Africa, with 7.8% growth rate in 2019 as reported in the 2019 publication of African Development Bank. In the recent times, there exists a deep comparison between Nigeria and Rwanda economies which makes it imperative to clear the air on the existing issue and employ the necessary empirical tests to substantiate or refute the argument. Hence, this study investigates the relationship between Foreign Direct Investment (FDI) and Economic Growth of both Nigeria and Rwanda. Time series data which were sourced mainly from World Bank, United Nations Conference on Trade and Development (UNCTAD) and National Bureau of Statistics (NBS) covering the period between 1970 and 2018 were used for this study. Growth models were developed for the two countries under study with the inclusion of Gross Domestic Product (GDP), Consumer Price Index (CPI), Net FDI Inflow and Total Export. Augmented Dickey-Fuller, Cointegration and Granger Causality tests for non-stationary time series were employed. The overall result depicts a long run relationship between FDI and GDP of both countries and FDI has a positive effect on Rwanda economy than that of Nigeria in the short-run but converse is the case in the long-run at 5% level of significance. Also, short-run causal relationship exists between the pairs of GDP, FDI, CPI and Total Export of Nigeria at 5% significance level. On the other hand, there exists a short-run causal relationship between GDP, FDI, CPI and Total Export of Rwanda at 5% level of significance. Hence, the study concludes that there is positive effect of FDI on Rwanda economic growth than that of Nigeria.