Assessing the Role of Foreign Direct Investment in Poverty Alleviation: Insights from Pakistan

Abstract

This research paper aims to help national policymakers understand the dynamics involved in the importance of foreign direct investment in poverty alleviation and thus formulate policies to attract FDI, utilizing time series data from 1990 to 2023. The study considers foreign direct investment (FDI), education, unemployment, and inflation as vital explanatory variables affecting poverty levels. Johnson's co-integration technique explored the long-term relationship between these variables and the poverty-ganger-cause test to determine whether one time series can predict another. Comprehensive research analysis, empirical evidence, and practical recommendations provide a solid foundation for policymakers, researchers, and development practitioners aiming to reduce poverty and foster economic growth in the country. The findings reveal significant long-term relationships between poverty and the independent variables: education, FDI, inflation, and unemployment. Specifically, education and inflation positively impact poverty, while FDI and unemployment have negative impacts. Notably, poverty does not cause FDI, nor does FDI cause poverty, as evidenced by p-values of 0.2996 and 0.4228, respectively. The study underscores the significant impact of FDI, inflation, and education on poverty. It highlights that foreign investment often displaces small local businesses, increasing unemployment and poverty. Therefore, the study recommends that the government implement robust policies and establish a monitoring team to curb corruption across all economic sectors. Furthermore, it suggests that the government should enforce financially solid policies, improve law and order, support small and medium enterprises, and urgently address the energy crisis to boost business opportunities and reduce poverty in Pakistan.