Dynamic impact of FDI inflows on poverty reduction:Empirical evidence from South Africa

Abstract

This paper investigates the direct impact of foreign direct investment inflows (FDI) on poverty reduction in South Africa from 1980 to 2014. Unlike the majority of the previous studies that relied on one poverty measure, this study employs three poverty reduction measures, namely, household consumption expenditure (Pov1), infant mortality rate (Pov2), and life expectancy (Pov3). The poverty proxies have been chosen based on the need to capture poverty in its multidimensional nature, which has not been fully explored in the literature. Using the recently developed autoregressive distributed lag approach (ARDL), the empirical findings of this study reveals that the impact of FDI on poverty reduction is sensitive to the poverty reduction proxy and the time under consideration, i.e., whether the analysis is conducted in the long run or in the short run. When infant mortality rate (Pov2) is used as a proxy for poverty reduction, FDI has a positive impact on poverty reduction in the long run and a negative impact on poverty reduction in the short run. However, when poverty reduction is proxied by household consumption expenditure and life expectancy, the study found no significant relationship between FDI and poverty reduction in South Africa – irrespective of whether the analysis is conducted in the short run or in the long run.