Foreign Direct Investment and Poverty Reduction

Abstract

It is widely proclaimed that capital account liberalization would immensely benefit developing economies because once capital controls are lifted, developing economies create a potential for movement of capital. And, this free movement of capital could possibly increase growth thereby lifting millions out of poverty. India has been gradually liberalizing since the 1980s and throughout more capital inflows were observed compared to outflows. Also, the composition of capital flows has been changing since the 1980s–with Foreign Direct Investment (FDI) inflows rising steadily post-1991compared to portfolio and debt flows. However, since 2000, FDI outflows from India were also witnessed. In this paper we empirically test the impact of FDI flows on poverty in India for 1980–2011. To provide a correct perspective to India’s performance we also analyze the link between FDI flows and poverty for SAARC countries. For a better understanding of how FDI flows impact poverty, we analyze the outflows and inflows separately. The results show both similarities and contrasts in the behaviour of India in comparison with the other SAARC countries.