Does governance matter to ensure significant effect of foreign direct investment on poverty reduction? Evidence from developing and emerging countries

Abstract

This paper examines the moderating role of governance in the effect of Foreign Direct Investment (FDI) on poverty using simultaneous equations models for sub-Saharan African, Asian, Latin American and Eastern European countries over the period 1996-2017. The main objective of this study is to examine the role of governance as a moderator of the FDI effect on poverty. Our analyses support a positive significant impact of FDI on poverty reduction in sub-Saharan Africa and Latin America but a negative effect in Eastern Europe, while it is not significant in Asian economies. In addition, we detect a positive conjoint impact of FDI and governance quality on poverty in all African, Latin American and Eastern European economic communities. However, this interactive effect is negative and not significant in Asia. This means that FDI reduces poverty in the presence of governance quality. Our results support that in the poorest countries (sub-Saharan Africa, Latin America), poverty is more sensitive to interactions between governance and FDIs than in the richest countries (ASIA). As policy implications of this study, governments in less developed regions must give great importance to improving the quality of governance. In this way, it becomes possible to attract foreign direct investment and increase household consumption reducing poverty as main purpose of Sustainable Development Goals (SDGs) for 2030.