Does poverty deter foreign direct investment flows to developing countries?

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 Method of Moments (GMM) technique. It has relied on two indicators of poverty, namely poverty headcount ratio and poverty gap. The 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) experience a higher negative effect of poverty on FDI inflows than other countries. On another note, poverty reduces FDI inflows to countries that restrict trade policies or experience lower level of trade openness, as well as to countries that experience a high degree of export product concentration. The paper discusses the implications of these findings.