Economic Integration and Globalization
Senior 6 · Economics
Economic Integration and Globalization
Lesson 4 of 5
25 min
Newspapers often quote investment figures for Rwanda that seem to disagree. They measure different things:
| Measure | Source | Figure |
|---|---|---|
| Registered investment commitments (planned projects, domestic and foreign) | Rwanda Development Board (RDB) | US$2.4 billion in 2023; US$3.2 billion in 2024 (612 projects, 51,635 jobs expected); US$2.62 billion in 2025 (799 projects) |
| Foreign direct investment inflows, from a survey of firms | Foreign Private Capital survey, reported by RDB | US$716.5 million in 2023; US$872.9 million in 2024 |
| Net direct investment in the balance of payments | National Bank of Rwanda (BNR) | US$518 million in 2024; US$595 million in 2025 |
Think: why is the RDB figure so much larger than the other two? Which one would you use to judge how much foreign money actually arrived?
Definition
Multinational corporation (MNC): a firm that owns or controls production or service facilities in more than one country, with its headquarters in one (the home country) and operations in others (host countries).
Foreign direct investment (FDI): investment by a firm or person in one country that gives it a lasting interest and control, conventionally at least 10% of the voting shares, in a business in another country.
Portfolio investment, by contrast, is buying shares or bonds without control.
Definition
Greenfield FDI: building new facilities from scratch, such as a new factory. Brownfield FDI: buying or merging with an existing firm (an acquisition).
Horizontal FDI: producing the same product abroad, to serve that market. Vertical FDI: producing a different stage of the supply chain abroad, such as a mining firm building a smelter.
Worked example 1: why the three measures differ
(a) Commitments are plans, spread over years. A registered project worth US$100 million may bring in only part of that money each year, and some projects are never completed. RDB also counts domestic investors: in 2024, investments of Rwandan origin (including joint ventures) made up the largest single share, 24.4% of registrations.
(b) Growth rates. Registered commitments rose from about US$2.4 billion to US$3.2 billion:
(RDB, using unrounded figures, reports 32.4%). Survey-measured FDI inflows rose by
(c) The balance of payments records net flows, after subtracting money that foreign investors take out, so it is smaller again. To judge how much foreign capital actually arrived, use the survey or balance-of-payments figures, not commitments.
To reach new markets (especially a growing region such as the EAC); to get raw materials; to use cheaper or more suitable labour and land; to avoid tariffs by producing inside a customs union; to benefit from tax incentives; and to spread risk across countries.
| Advantages | Disadvantages |
|---|---|
| Brings capital without adding to government debt | Profits and dividends flow back abroad (primary income debits) |
| Creates jobs and trains workers and managers | Top jobs may go to foreign staff; low wages in some sectors |
| Transfers technology and management skills | Technology may stay inside the firm; little linkage with local suppliers |
| Raises exports and earns foreign exchange | Imports of inputs and repatriated profits can outweigh export earnings |
| Pays taxes and builds infrastructure | Tax holidays and transfer pricing reduce tax paid |
| More competition and choice | Can drive local firms out and gain monopoly power |
| Links the country to world markets | Can exhaust resources, pollute, or influence government policy |
Definition
Transfer pricing: the prices at which parts of the same MNC trade with each other across borders. By overcharging a subsidiary in a high-tax country for inputs, an MNC can shift profit to a low-tax country and pay less tax.
Worked example
Worked example 2: how transfer pricing moves profit (illustrative)
An MNC's subsidiary in country H sells output worth US$10 million and pays US$4 million for local costs. It also buys inputs from its parent company abroad.
| Inputs charged at US$3 million (fair price) | Inputs charged at US$5 million (inflated) | |
|---|---|---|
| Profit in country H | million | million |
| Tax in H at 30% | million | million |
Inflating the internal price moves US$2 million of profit out of H and cuts H's tax revenue by US$0.6 million. Tax authorities counter this with the "arm's length" rule: internal prices must match what independent firms would charge.
Reports on Rwanda's investment climate by the United States Department of State (2023 to 2026) list obstacles such as:
Warning
Registered is not invested. A registered commitment is a plan. Many exam answers quote the RDB total as "FDI received". Say "registered investment commitments" and, where possible, compare them with the inflows actually recorded.
Tip
Judge FDI by its linkages. FDI helps most when the foreign firm buys from local suppliers, trains local staff, exports and reinvests its profits. Ask about each of these before calling an investment good or bad.
Important
Discuss. Rwanda offers tax holidays of up to seven years to attract investors in selected sectors. Do the jobs, skills and exports gained justify the tax revenue given up? What conditions would you attach to such incentives?
EconplusDal, "FDI (Foreign Direct Investment) and Development" (about 9 minutes). The benefits and costs of FDI for developing countries, with evaluation. List his costs and decide which apply most to Rwanda.
Practice
Sources and credits
Written by Ganzaa: the chart, the tables, the worked examples and the practice items. The subsidiary in worked example 2 is illustrative.
