FDI AND POVERTY REDUCTION: A CRITICAL REAPPRAISAL OF THE ARGUMENTS

Abstract

Over the last two decades, enormous efforts have been made by developing countries to attract Foreign Direct Investment (FDI). It is commonly agreed upon that, by accelerating economic growth, FDI is a determining feature in poverty reduction. This paper argues that this view needs to be qualified by considering the stylistic facts and existing empirical evidence on the contribution of FDI to growth and poverty reduction. Echoing work by trade economists on the impact of trade on poverty reduction, a simplified framework is suggested which breaks down the influence of FDI into its "growth enhancing" and "distributional" effects. Contrary to the (now) conventional wisdom, little evidence is found that FDI is a major instrument for poverty reduction.

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