Do foreign direct investments have an effect on poverty? Policy Perspective

Economic jargon can be confusing for any leader. However, a leader may still want to know, what Foreign Direct Investment is?

Economic jargon can be confusing for any leader. However, a leader may still want to know, what Foreign Direct Investment is?

The International Monetary Fund, (IMF), defines FDI as long-term investment, reflecting a lasting interest and control by a foreign direct investor (or parent enterprise of an enterprise entity resident in an economy other than that of the foreign investor. 

The FDI’s influences on poverty reduction can be classified into indirect and direct impacts. The indirect impacts work through foreign direct investment contribution to economic growth - given the increasingly accepted role of economic growth in poverty reduction.

In addition, foreign direct investment contributes to tax income of the country’s budget and may thus facilitate government-led programs for the poor (Klein, 2000).

Furthermore, foreign direct investment may induce host governments to invest in infrastructure. If this investment is in poor areas it will benefit the local poor.

The direct impact of FDI on poverty is assumed to be its effects on unemployment.

However, concerning the foreign direct investment‘s indirect impact on poverty, FDI may affect economic growth through raising total capital formation.

This is because the FDI, provides external finance and may help to reduce financial constraints on investment due to low savings in Least Developing Countries (LDC).

Some writers on FDI such as Burger emphasize that FDI may crowd in domestic investment through backward and forward linkages further pushing economic growth.

More importantly, FDI tend to bring technology, know-how, management and marketing skills to developing countries thus giving out something more than a simple import of capital.

How does FDI have an effect on poverty?
FDI is thought to contribute to economic development (and therefore poverty reduction) through initial macroeconomic stimulus and by raising efficiency of resource use in the receipt economy by:

• Transferring more advanced technology and organizational forms directly to multinational corporations affiliates in the host country
• Triggering technological and other spillovers to locally owned enterprises
• Assisting human capital formation
• Contributing to international trade integration
• Helping to generate a more competitive business environment while enhancing enterprise development. 

However, according to the neoclassical theory, FDI influences income growth by increasing the amount of capital per person.

Recent, endogenous growth theorists such as Lomer (1986) and Locus (1988), argue, that FDI spur long-run growth through variables such as research and development and human capital.

It is believed that through technology transfer to their affiliates and technological spillovers to unaffiliated firms in the host economy, Multi National Corporations (MNCs), can speed up the development of new intermediate product variables, raise product quality, facilitate international collaboration on research and development, also introducing new forms of human capital.

Consequently, is Africa realizing its hopes of combating poverty through FDI? The answer is probably yes and no.

Yes it has been shown that a few African countries are realizing their hopes of attracting significant, FDI inflows and have started reaping the fruits of FDI’s, such  countries include  Mauritius and some Caribbean countries.

No, for now because some countries in the sub Saharan region benefits on foreign investments are not automatic; they require proactive, deliberate, strategic policy and adequate technological capacity for investments to prosper in the region.

However, in my point of view FDI, can combat poverty provided that both local and foreign investors do not engage only in investing in exploiting natural resources.

Potential investors should also invest in the agricultural sector since it’s the mainstay for most of African economies.

We need to transform our agricultural economies from subsistence to a commercial one. To do this, more investments are needed since this is a sector where most of the rural people in Africa depend on.

However, on the African side, the most rapidly increasing type of the FDI’s has been in the form where- by investors try to use the available abundant labor resources as a platform for the exports.

Furthermore, we shouldn’t ignore investment in small businesses since these kinds of businesses have long been the foundation and engine for economic growth in successful economies world wide.

Investments Guru William Bernstein in his book “The Birth of plenty” outlines four straightforward but intuitive factors involved in creating and supporting growth through investments. 

They are: secure property rights; a systematic framework to understand the world, something he calls “The scientific method”, a modern capital market place; and infrastructure to communicate and transport people and goods effectively.

However, each partner and player in the endeavors to promote economic growth and prosperity has a contribution to make. When these efforts are disconnected and disjointed, progress is greatly hampered.


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