Investigating the relationship of inward foreign direct investment and poverty in developing countries

Abstract

Poverty is one of the most discussed issues in the global arena and FDI has been suggested to be an important ingredient in poverty reduction. Although many countries have integrated more into the world economy, there are still over a billion people living in absolutely poverty and the situation is not improving. This has raised some suspicions on the validity of the current global policies in poverty reduction.

This study examines the relationship between Foreign Direct Investment and poverty, and look at how Nicaragua has done compared to other developing countries. The theoretical part of the study is based on the most recent literature from the areas of International Business and Development Economics. The literature review consists of studies regarding Foreign Direct Investment, economic growth and poverty. The empirical research is conducted as a quantitative cross country study by using linear regression modelling. The comparison between developing countries and Nicaragua is done by using the created regression models.

The results show that higher levels of FDI were associated with lower levels of relative poverty, measured by the national poverty lines. However, absolute poverty and the more multifaceted Human Poverty Index did not have a statistically significant relationship with the measured FDI stocks. These findings highlight the importance clearly justifying the use of a poverty measure, as different legitimate measures of poverty led to different results. Although a devastating civil war was fought in Nicaragua, it has managed to allure reasonable amounts of FDI and steadily decrease the amount of people living in poverty. Nicaragua has also managed to reduce poverty accordance to the FDI inflows it has received compared to other developing countries, albeit the civil war.