Direct Impact of Fdi on Poverty Reduction

Topics: Macroeconomics, Capital, Investment Pages: 3 (1034 words) Published: July 6, 2012
Direct impact of FDI on poverty reduction
FDI’s direct impacts on poverty may work through providing opportunities, particularly providing jobs and training to local workers. To the extent that foreign capital inflows do not replace local investment absolutely and foreign investment takes the mode of green- field investment FDI may contribute to reducing existing unemployment and underemployment, providing people with income and therefore directly contributing to poverty reduction. In this sense FDI’s impact on poverty works through its impacts on employment. This impact has been considered a major impact of FDI on poverty (Chudnovsky and Lopez 1999, IFC 2000, Saravanamuttoo 1999).

FDI’s impacts on employment refers not only to employment created within FIEs (direct employment) but also to employment created in related entities vertically or horizontally or macroeconomically (indirect employment) (UNCTAD 1994, pp. 192-95). With direct employment, FDI may reduce unemployment or underemployment when it comes under the mode of green-field investment. Green-field investment implies investment which relates to producing distinctive products without close substitutes in the host country. Conversely, FDI may raise unemployment when it is a merge-and-acquisition (M&A) activity. This is because M&A activities are usually followed by restructuring the merged enterprise in accordance with the objectives underlying the M&A (UNCTAD, 1999, p.261). However, when FDI takes the mode of merge-and-acquisition of moribund enterprises it may help prevent potentially increased unemployment and therefore poverty. In other situations, foreign investors may preempt investment opportunities for any local firms, the resulting direct unemployment impact may not be of great value since similar results would have been occurred otherwise. With regard to indirect employment in vertically related entities, including backward (or upstream) linkages like suppliers, subcontractors,...
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