Does foreign direct investment affect poverty in BRICS?

Abstract

This study examined the influence of foreign direct investment (FDI) on poverty alleviation in BRICS countries (Brazil, Russia, India, China, and South Africa) using panel methods of econometric estimation, namely pooled ordinary least squares (OLS), fixed effects and fully modified ordinary least squares (FMOLS). Data from 1989 to 2020 was used in this study. The majority of research on FDI-led poverty has ignored the omitted variable bias. Economic growth as a channel in the FDI–poverty nexus was also explored. The relationship between FDI and poverty has so far produced mixed results with no general consensus, hence triggering the undertaking of this study in the context of BRICS. Except for mortality rate, poverty alleviation triggered by FDI was achieved in BRICS (model 1 under fixed effects; model 2 under pooled ordinary least squares (OLS). Economic growth-led poverty reduction was observed across all the three panel methods. The interaction variable (FDI x economic growth) significantly enhanced poverty reduction in model 1 and model 3 across the three panel data methods employed. Similar results were observed in model 2 under the pooled OLS methodology. Policies geared at promoting FDI to reduce poverty should be implemented by BRICS authorities. Further research should explore the minimum threshold levels of FDI necessary to significantly reduce poverty in BRICS as such a study would be more useful and relevant for policymaking decisions relating to poverty reduction.