Do Foreign Direct Investments contribute to Rwanda’s economic growth?

Workers at G&H Garments Co. plant at the Special Economic Zone in Kigali. File.

Foreign Direct Investment (FDI) has been appraised by many researchers, as an important contributor to the economic growth and development of nations (Borgean. C. 2015). However, there seems to be a required trend of performance for any economy to attain a sustainable flow of FDIs and maximise the expected benefits to the best of its national interest, especially when the welfare of its population is at its forefront. Some economies tend to attract more FDIs than others while some sectors of the economy tend to receive more FDIs. Worldwide, FDIs tend to flow from developed to developing economies, though the current trend seems to be changing direction, where Chinese FDIs are currently flowing to US.

Rwanda, a developing economy, was strongly devastated by the tragedy of genocide during which over 1 million people were massacred, valuable assets destroyed, and rebuilding the nation would not be a one country’s task, rather efforts from within and outside the country… the international organisations, and Foreign Direct Investors.

FDI is defined as “the formation of a lasting interest” by investors from a different economy to a host country with substantial shares and a controlling power of approximately 10% control (OECD 2015). The phenomenon behind FDI is that the investors with huge sums of funds, in most cases Multinational Companies (MNCs), try to seek opportunities in various economies with diverse ambitions to invest their fortunes. Investors are usually attracted to particular economic sectors depending on their strategic approach and all based on the general economic, social and political environment of the host economy. If the market in a host economy is small, with political instability, and in a stagnant economy, investors may restraint from investing.

Economic Growth is defined as the increase in an economy’s ability to improve production of goods and services, comparison made in a given time flame, (Moroianu N, Moroianu. D 2012). The welfare of the people in an economy is most likely to be one of the indicators of Economic Growth. If the purchasing power of the population increases, then the people can afford the basics and thus increase expenditure. Whatever is produced will meet consumers’ capacity… and this is one important aspect that investors are looking for…‘market’.  The good news for investors in Rwanda is that they have access to the markets in the East African countries, since some of the trade obstacles have been removed, and important infrastructures put in place.

Rwanda‘s economic growth has been steady in the last two decades, while the Government has put much efforts in attracting  FDIs so as to contribute to the capital formation. Rwanda has been undertaking reforms to attract foreign investors; especially in improving policies, pro investments… Foreign and domestic investors alike.

The attraction of FDISs depend on several factors, where Rwanda’s efforts focused on several of them like policy reform... The Government has a series of policy reform aiming at attracting and retaining foreign investors. The country presents numerous opportunities for foreign direct investments, including renewable energy, education, infrastructure, agriculture, mining, tourism, and information technology and communications.

Discerning the economy of Rwanda from where it came from in the past two decades, seeing the economic struggle to uplift the living conditions of the population, and policies usually thought to implement in a devastated nation like Rwanda, there was definitely those strategies behind the current trend of economic growth, where Rwanda’s GDP is at a good level in Africa, in relation to Foreign Direct Investments. Rwanda’s FDI inflow increased from $3 million in 1997 to $410 million in 2016, a huge leap in only two decades. 

The Global Investment Trend Monitor reported a 14 per cent decline in FDI inflows in the 16 African LLDCs whereas Rwanda’s FDI inflows increased by 8 per cent. (UNCTAD 2017 No. 26. P5). 

The World Investment Report (WIR) 2017, affirmed that FDI is the principal contributor of source of funds for investments as the external source of finance for developing economies; compared to portfolio investment, remittances and Official Development Assistance (ODA).

The global investment trend monitor reported that Rwanda’s FDI increased by 8 percent to US $410 million, thus did well by 14 per cent among the LLDCs, while other countries in LLDCs indicated a decline in 2016. This happened when Rwanda showed economic growth rate of 6.1 per cent, the 7th in the top ten Africa GDP growth (African Investment Report 2017).

Rwanda’s economy saw the importance of foreign direct investors in various sectors and keeps doing its best to attract foreign investors to contribute to the national economic growth through job creation, boost ing production of goods and services, and contributing to the tax revenues…

 

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