The impact of financial sector foreign direct investment on poverty alleviation

Abstract

Foreign private capital flows, portfolio investment and foreign direct investment (FDI), have been important external sources of financing growth and investment around the world. Since the start of the new millennium, FDI has become a major source of external finance for many developing countries mainly due to the economic benefits associated with this investment. Developing countries have been jostling for FDI in an attempt to resolve some of their structural problems, such as poverty. Poverty is a sensitive and persistent issue in most developing countries. More recently, FDI into the financial sector (FSFDI) has increased significantly, reshaping the sector significantly. The widely-held perception is that FSFDI is associated with financial development, job creation and skills transfer which are critical factors in alleviating poverty. In spite of the significant inflow of investment, new estimates of poverty in the developing world are disconcerting.Foreign private capital flows, portfolio investment and foreign direct investment (FDI), have been important external sources of financing growth and investment around the world. Since the start of the new millennium, FDI has become a major source of external finance for many developing countries mainly due to the economic benefits associated with this investment. Developing countries have been jostling for FDI in an attempt to resolve some of their structural problems, such as poverty. Poverty is a sensitive and persistent issue in most developing countries. More recently, FDI into the financial sector (FSFDI) has increased significantly, reshaping the sector significantly. The widely-held perception is that FSFDI is associated with financial development, job creation and skills transfer which are critical factors in alleviating poverty. In spite of the significant inflow of investment, new estimates of poverty in the developing world are disconcerting.The main objective of this study was to evaluate the impact of FSFDI on poverty alleviation in developing countries. Linear regression analysis was done to determine the relationship between FSFDI inflow and other variables that were viewed as reducing agents of poverty, namely financial sector employment, employee training and financial access. The sample data used for this research represents South Africa and a convenience sampling technique was utilised.