FDI and poverty reduction in Botswana: A multivariate causality test

Abstract

In this study, the causal relationship between foreign direct investment (FDI) inflows and poverty reduction is investigated in Botswana from 1980 to 2014. The study has used a trivariate causality model; and economic growth has been included as the intermittent variable between poverty reduction and foreign direct investment. In addition, three proxies of poverty have been used: 1) household consumption expenditure; 2) infant mortality rate; and 3) life expectancy. The study has used the autoregressive distributed lag (ARDL) bounds testing approach to cointegration and the ECM-based causality test to examine this linkage. The empirical results show that there is a distinct unidirectional causality from FDI to poverty reduction, but only in the short run, when household consumption expenditure is used as a proxy for poverty reduction. When infant mortality rate is used, the study finds bidirectional causality between FDI and poverty reduction – both in the short run and the long run. However, when life expectancy is used as a poverty reduction proxy, no causal relationship is found to exist, irrespective of the time considered. Based on the results from this study, it can be concluded that the causal relationship between poverty reduction and FDI is sensitive to the proxy used to measure the level of poverty reduction and to the time-frame considered.