FDI inflows and poverty reduction in Botswana: an empirical investigation

Abstract

This study investigates the impact of foreign direct investment (FDI) inflows on poverty reduction in Botswana from 1980 to 2014. The main objective of this study is to establish whether FDI plays a positive role in poverty reduction. The study employs autoregressive distributed lag (ARDL) bounds test approach to co-integration and the error correction model to investigate the relationship. To ensure robustness, the study uses three poverty reduction proxies which are household consumption expenditure (Pov1), infant mortality rate (Pov2), and life expectancy (Pov3). The findings from this study revealed that FDI has a positive impact on poverty reduction in the short run and a negative impact in the long run when life expectancy is used as a poverty reduction measure. When infant mortality rate is used as a poverty reduction proxy, an insignificant relationship is registered in both the long run and the short run. A negative impact of FDI on poverty reduction is confirmed in the short run when household consumption expenditure is used as a poverty reduction proxy, while in the long run an insignificant relationship is reported. The study concludes that the impact of FDI on poverty reduction is sensitive to the poverty reduction proxy used.

Keywords:

• Botswana
• poverty reduction
• foreign direct investment
• household consumption expenditure
• infant mortality rate
• life expectancy
• autoregressive distributed lag

JEL classification:

• F21
• I32

PUBLIC INTEREST STATEMENT

In this study, the impact of foreign direct investment (FDI) on poverty reduction is investigated for Botswana employing data from 1980 to 2014. The main objective of the study is to investigate if FDI can be used as a policy instrument in poverty reduction in Botswana. Three poverty reduction proxies namely, household consumption expenditure, infant mortality rate, and life expectancy are used in the study to capture multi-dimensional nature of poverty and to increase the robustness of the results. By employing autoregressive distributed lag (ARDL) bounds test approach, the impact of FDI on poverty reduction is investigated. The findings from this study revealed that FDI plays a less important role in poverty reduction in Botswana as evidenced by one out of three (life expectancy) poverty reduction proxies where a short-run positive relationship is confirmed. These findings suggest that Botswana may use FDI as a short-term poverty reduction instrument.

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

M. T. Magombeyi

M. T. Magombeyi is a doctoral student at the University of South Africa.

N. M. Odhiambo

N. M. Odhiambo is a Professor in the Economics Department at the University of South Africa.