Foreign Direct Investment and Poverty in Latin America

Most Latin American countries crafted market-friendly reforms during the 1990s. In particular, the political discourse often stressed the attraction of foreign direct investment (FDI) as a key component of the quest for development and particularly the fight against poverty. However, the precise link between FDI and poverty has been neglected by the literature, at least by that with an empirical focus on Latin America. We formulate a simple model, where capital is the limiting factor, and labor units are idle, in spite of wellfunctioning local factor markets. Poverty thus results from unemployment. Panel data from twenty Latin American countries support our view of capital shortage as a factor affecting poverty, and hence of FDI as a potential contributor to poverty reduction. Both domestic and foreign investment were found to be significant determinants of poverty changes. Importantly, the impact of FDI varies across countries, so that FDI reduces poverty only under certain circumstances, and fails in others.