Foreign Direct Investment and its Implications for Economic Growth and Poverty Alleviation in Southern Africa

One of the most visible indicators of the increasing global integration of the world economy over the past decade or so has been the phenomenal growth of Foreign Direct Investment (FDI) flows and expansion of cross-border activities of multinational enterprises. FDI inflows are considered as channels of entrepreneurship, technology, management skills, and resources that are scarce in developing countries and Southern Africa in particular. Recent developments in growth theory highlight the importance of improvements in technology, efficiency and productivity in simulating growth. In this regard, FDI’s contribution to growth comes through its role as a conduit for transferring its advanced technology from the industrialized to the developing economies and as such FDI inflows could help in the industrialization of the host countries. For instance, Findlay (1978) postulates that FDIs increases the rate of technical progress in the host country through a “contagion” effect from the more advanced technology and management practices used by foreign firms. Since FDI is said to be the most stable source of private capital for developing and transition economies, attracting FDI is at the top of the agenda of such economies around the world as they aim to reduce poverty that is deep and widespread. The paper will look at FDI and its contributions; discuss the relationship between FDI and economic growth; explore the determinants of FDI and economic growth; consider the implications of FDI to economic growth and poverty alleviation; examine Taiwan’s experience when its development was closer to current levels in Africa and Southern Africa in particular; and explore how the Southern African region can attain economic growth through FDI and alleviate its deep and widespread poverty. In trying to assess the extent to which FDI contributes to construction of production facilities, infusion of innovative technologies, management strategies, workforce practices, new employment, and skill transfer, the paper seeks to shed light on appropriate policies to pursue in order to encourage high volumes of FDI and their likely implications for economic growth and poverty alleviation. While economic growth is not synonymous with economic development, it is at least necessary. Provided that mechanisms exist to facilitate some trickle-down of the benefits of economic growth to the impoverished, economic growth can aid in poverty reduction. The most important mechanism by which trickle-down occurs is via employment-creating economic growth. In this way, it is possible that, if FDI serves as a catalyst for economic growth, it will stimulate development and contribute to alleviating poverty (Lipsey, R., 2000). David Dollar (2001) states that Globalization has been a force for growth and poverty reduction in a diverse group of countries and defines globalization as the growing integration of economies and societies around the world as a result of flows of goods and services, capital, people, and ideas. He claims that integration accelerates development and reduces gaps between the developed and developing countries by raising productivity in the developing world. In this way globalization can be a powerful force for poverty reduction. FDI is one element that links the Southern part of Africa to the global economy and as a World Bank report (2001) shows that rapid economic growth and poverty reduction are positive aspects of globalization, the volume of FDI attracted will have an influence on whether the Southern Africa’s poor can benefit from the globalization of markets