The impact of foreign direct investment, foreign aid and trade on poverty reduction: Evidence from Sub-Saharan African countries

Abstract

Despite postulations on the effects of foreign direct investment (FDI), foreign aid, and trade on growth, empirical evidence from extant research has been mixed. The focus of recent research has shifted from the growth effects of these international flows to their poverty reduction effects. However, results have also been mixed. Most studies have examined the empirical evidence of these flows separately and have mostly conducted single country studies. In this study, we use data from twenty-nine countries in Sub-Saharan Africa between the period 1990–2017 to analyze the effects of FDI, trade, and foreign aid on poverty reduction in a single model using the Feasible Generalized Least Square (FGLS) technique. Our results show that FDI and foreign aid have a negative effect on poverty reduction in the countries studied. These results suggest that the level of FDI required to alleviate poverty has not been reached, and foreign aid have not been properly channeled. However, the results show that trade has a positive and significant impact on poverty reduction, especially in low-income countries. We conclude with policy recommendations.