Does Foreign Direct Investment Reduce Poverty in Africa and are There Regional Differences?

Abstract

This paper re-examines the relationship between foreign direct investment (FDI) inflows and welfare (or poverty reduction) in Africa. Using FDI net inflows per capita and the United Nations Development Program’s Human Development Index as the principal variables, our analyses confirm the positive and strongly significant relationship between FDI net inflows and poverty reduction in Africa but find significant differences among African regions. We also find that FDI has a greater impact on welfare in poorer countries than it does in wealthier countries. For instance, while the relationship between FDI and poverty reduction is positive and significant for economic communities in Central and East Africa, it is non-significant in Northern and Southern Africa. Furthermore, the relationship was found to be ambiguous in West Africa. Our results are robust to many model specifications.