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Empirical evidence of the impact of FDI, trade openness, and financial development on domestic investment in Rwanda

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  • Ulrich Ekouala Makala

    (Université de Reims Champagne Ardenne, CRIEG, REGARDS)

Abstract

This study investigates the impact of international trade channels on domestic investment in Rwanda over the study period from 1980 to 2020. The paper first, assesses the impact of Foreign Direct Investment (FDI) on domestic investment using a bivariate relationship, before investigating the impact of financial development channel and the trade openness channel. The research aims to determine the channel by which the country should focus to optimize the gains from international trade. The study employs the Ordinary Least Squares (OLS) as a baseline model and the Generalized Method of Moments (GMM) as an alternative technique. The empirical findings showed that the FDI improves the level of domestic investment in Rwanda only if the level of FDI is sufficiently important otherwise the effect of FDI on domestic investment will be crowded out. Regarding the financial development channel, a negative relationship is highlighted, While the study concludes that trade openness is the most pertinent channel to drive domestic investment in Rwanda. The originality of this study is double: it helps to know the best channel to crowd in domestic investment in Rwanda as well as the best strategy for Africa to benefit from their natural resources.

Suggested Citation

  • Ulrich Ekouala Makala, 2025. "Empirical evidence of the impact of FDI, trade openness, and financial development on domestic investment in Rwanda," SN Business & Economics, Springer, vol. 5(4), pages 1-25, April.
    • Handle: RePEc:spr:snbeco:v:5:y:2025:i:4:d:10.1007_s43546-025-00803-0
    DOI: 10.1007/s43546-025-00803-0
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    More about this item

    Keywords

    FDI; Trade openness; Financial development; Domestic investment; OLS; GMM;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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