Preprint Article Version 1 Preserved in Portico This version is not peer-reviewed

Does Poverty deter Foreign Direct Investment flows to Developing Countries?

Version 1 : Received: 4 November 2020 / Approved: 6 November 2020 / Online: 6 November 2020 (09:03:02 CET)

How to cite: Gnangnon, S.K. Does Poverty deter Foreign Direct Investment flows to Developing Countries?. Preprints 2020, 2020110230 (doi: 10.20944/preprints202011.0230.v1). Gnangnon, S.K. Does Poverty deter Foreign Direct Investment flows to Developing Countries?. Preprints 2020, 2020110230 (doi: 10.20944/preprints202011.0230.v1).

Abstract

The present paper investigates the effect of poverty on foreign direct investment (FDI) inflows in developing countries. It complements the important extant literature on the effect of FDI inflows on poverty by examining the issue the other way around. The analysis is conducted using a sample of 117 countries over the period 1980-2017, and the two-step system Generalized Methods of Moments (GMM) technique. It has relied on two indicators of poverty, namely poverty headcount ratio and poverty gap. Findings indicate that over the full sample, poverty influences negatively FDI inflows, including through its adverse effect on human capital (that is, both education and health). Unsurprisingly, low-income countries (considered as poorest countries in the full sample) experience a higher negative effect of poverty on FDI inflows than other countries. On another note, participation in international trade matters for the effect of poverty on FDI inflows. In fact, an increase in poverty levels results in lower FDI inflows in countries that experience low workers' productivity, a less developed financial sector, and a low level of infrastructure development. Furthermore, the effect of poverty on FDI inflows does not depend on the prevailing economic growth rate. Finally, the analysis has revealed the existence of a non-linear effect of poverty on FDI inflows for the poverty headcount indicator, but not for the poverty gap indicator. The non-linear effect of poverty headcount on FDI inflows is such that a rise in poverty headcount ratio results in lower FDI inflows, but an additional increase in poverty more than further discourages FDI inflows. The conclusion discusses the implications of these findings.

Subject Areas

Poverty; Foreign direct investment inflows; Human capital; Trade openness; Export product diversification; Economic growth; Labour productivity; Financial development; Infrastructure development.

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