Does Trade Openness and Foreign Direct Investment Complement or Substitute Each Other in Poverty Alleviation?
Does Trade Openness and Foreign Direct Investment Complement or Substitute Each Other in Poverty Alleviation?

Summary/Abstract: This paper investigated whether trade openness and foreign direct investment (FDI) complemented or substituted each other in alleviating poverty in European, Latin American and Asian emerging markets using panel data analysis with data ranging from 1994 to 2014. The study found out that trade openness and FDI neither complimented nor substituted each other in the process of alleviating poverty. The implication of the study is that European, Latin American and Asian emerging markets studied should increase their levels of trade openness in order to accelerate poverty reduction. They should also avoid relying on FDI as a source of capital for their economic activities and poverty reduction efforts as that could easily achieve the opposite unintended outcome in line with the dependency theory of FDI. As per expectation, control variables such as human capital development, education and infrastructural development were found to have had a poverty reduction effect whilst inflation increased the poverty levels. These emerging markets should therefore increase their investment towards human capital development, education and infrastructural development in order to reduce poverty levels. However, FDI and remittances increased poverty levels possibly because there are certain pre-conditions that must exist before FDI and remittances can contribute to poverty alleviation.

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