The purpose of this paper is to assess the relationship between poverty and foreign direct investment (FDI) at the macro-pathway in developing countries. The contribution to host countries from FDI can take several forms, such as the transfer of technology, human capital development, increased competition in domestic markets, and the generation of corporate tax revenues, among others. The paper develops a data set and an econometric model to analyze poverty alleviation in terms of impact of FDI flows at the macro level panel data set.
Key Words: Poverty, FDI, Reduction, Modeling.
Jel Classifications: F21, C13, C51
Purpose – The purpose of this paper is to assess the relationship between poverty and foreign direct investment (FDI) at the macro-pathway in developing countries. The contribution to host countries from FDI can take several forms, such as the transfer of technology, human capital development, increased competition in domestic markets, and the generation of corporate tax revenues, among others. In principle, therefore, through these various channels, this type of capital should contribute to investment and growth in host countries. However, while foreign investment may be good for development, different countries with different policies and economic factors tend to derive different benefits from it (Loungani, 2001).
Design/methodology/approach – The paper develops a data set and an econometric model to analyze poverty alleviation in terms of impact of FDI flows at the macro level panel data set. VAR and Tobit model are appropriate technique for this kind of business cycle.
Findings – Foreign direct investment can have direct and indirect impacts on poverty reduction in the host country. The empirical results derived from macro level data support the findings in some of the established literature and indicates that FDI tends to flow to areas with high factor productivity; and that increases in higher labor productivity lead to higher investment. According to the Farrell (2004) FDI is costing governments millions of dollars annually, protecting inefficient players, and lowering living and productivity standards. Nevertheless it is difficult to deduce any direct relationship between FDI and poverty alleviation due to the many interfering variables.
Research limitations/implications – This paper has used a panel macro data set. A further area of research would be to carry out a similar exercise with panel (micro) data.
Originality/value – Despite the many studies on this subject impulses and responses were investigated from the theoretical model at the macro level in this study and especially in terms of FDI variable. Thus the impact of foreign capital in poverty was to be observed exactly and in all sectors of the fact whether or not interpreted.