Abstract:
This paper examines empirically the causal relationship among exports, gross capital formation,
foreign direct investments and economic growth using a multivariate autoregressive VAR model
for Rwanda over the period 1980-2012. The results of cointegration test suggested that there is
three cointegrated vectors between the examined variables, while Granger causality tests showed
that there is a bi-directional causal relationship between the per capita GDP and the ratio of gross
fixed capital formation to GDP. Also There is a unidirectional causal relationship between the
ratio of exports to GDP and the ratio of foreign direct investments to GDP with direction from
exports to foreign direct investments, a unidirectional causal relationship between the ratio of
foreign direct investments to GDP and the per capita GDP with direction from foreign direct
investments to per capita GDP, and final a unidirectional causal relationship between the ratio of
exports to GDP and the ratio of gross fixed capital formation to GDP with direction from exports
to gross fixed capital formation .
The findings show that in the short-run an increase of 1% on ratio of exports to GDP will lead to
an increase of 0.12% on per capita GDP, an increase of 1% on the ratio of gross fixed capital
formation to GDP will lead to an decrease of 0.2% on per capita GDP, while increase of 1% on
ratio of foreign direct investment to GDP will lead to an decrease of 0.051% on per capita GDP,
but the speed of adjustment back to equilibrium is 3.7 percent annually adjustments in the short
run however the value of coefficient is statistically significant at 10 percent but insignificant at 5
percent.
